We maintain our long-term Neutral recommendation on
Chesapeake Energy Corporation
(
CHK
) -- the second largest natural gas producer in the U.S.
Oklahoma-based Chesapeake is an independent oil and gas company
engaged in the acquisition, development and production of onshore
U.S. natural gas resources. The company remains one of the
industry's most active players in managing assets through a
combination of acquisitions and disposals.
With an inventory of unconventional resource potential bigger
than probably any other domestic independent, Chesapeake boasts a
leading position in 12 of the top 15 unconventional liquids-rich
plays in the U.S., comprising the Anadarko Basin, the Utica Shale,
the Eagle Ford Shale and the Niobrara Shale.
Although Chesapeake's average daily production in the first
quarter of 2012 increased nearly 18% year over year, natural gas
accounted for 81%. Hence, given the downtrend in natural gas
prices, the company registered lower-than-expected earnings of 18
cents that declined 76% from the year-ago quarter.
It was the weak gas price environment that shattered the
company's financial strength. The company has been in the news
recently as it is struggling to fund its capital budget amid
diminishing cash flows in a weak natural gas price scenario.
Chesapeake intends to devolve as much as $11.5 billion to $14.0
billion worth of assets this year in order to bridge the funding
gap of $9 billion to $10 billion.
At the end of the first quarter, debt balance stood at $13.1
billion, representing a debt-to-capitalization ratio of 44.2%
(versus 39.0% in the preceding quarter). Chesapeake took $4 billion
of an unsecured term loan to pay down its revolving credit line.
The new loan comes at an initial interest rate of 8.5%, which could
eventually exceed 11.5% if the company fails to pay it off by the
year-end.
Though Chesapeake's ongoing asset monetization initiatives are
working well, its balance sheet is still more leveraged than its
peers. The company also exhibits a weak financial profile with a
huge debt balance.
Given the current gas price scenario, Chesapeake intends to
deploy more funds toward liquids, with 90% of its capex planned for
drilling liquids-rich plays this year. In particular, Chesapeake
plans to invest heavily in the development of its holdings in the
Eagle Ford Shale, Granite Wash and Mississippi Lime. We also
appreciate management's focus on the Utica Shale, which is expected
to contribute highly to the company's growth momentum going
forward.
However, we prefer to remain in the sidelines as the embattled
company is still trying hard to minimize capital expenditures
through its divestiture program. As such, we see the stock
performing in line with the broader market.
Chesapeake, which competes with
EOG
Resources Inc
(
EOG
), holds a Zacks #3 Rank that is equivalent to a Hold rating for a
period of one to three months. We maintain our long-term Neutral
recommendation for the company.
CHESAPEAKE ENGY (CHK): Free Stock Analysis
Report
EOG RES INC (EOG): Free Stock Analysis Report
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