We maintain our long-term Neutral recommendation on the second
largest natural gas producer in the U.S. −
Chesapeake Energy Corporation
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The company's better-than-expected third quarter results with
higher production and its keenness on deploying more funds toward
liquids remain partially tempered by the weak ongoing natural gas
The Oklahoma-based natural gas giant reported
better-than-expected third quarter earnings on 24.4%
year-over-year growth in production. Chesapeake also slightly
upped its full-year 2012 production guidance encouraged by
higher-than-expected liquids volumes but left the 2013 production
Given the downtrend in natural gas prices, the company intends to
allocate the majority of its capital to drill liquids-rich plays
in the near future. The spending will be primarily targeted
toward Eagle Ford Shale, Utica Shale, Mississippi Lime, Granite
Wash, Cleveland, Tonkawa, Niobrara, Bone Spring, Avalon, Wolfcamp
Chesapeake increased its drilling capital expenditure guidance
for 2012 by $500 million to $8,750 million. Most importantly, the
company's efforts seem to produce desirable results, as reflected
by a 96% year-over-year increase in the average daily oil
production during the third quarter.
With the biggest inventory of unconventional resource potential
than probably any other domestic independent, Chesapeake boasts a
leading position among the top unconventional liquids-rich plays,
comprising Eagle Ford, Utica, Granite Wash, Cleveland, Tonkawa,
Mississippi Lime and Niobrara as well as in the Marcellus,
Haynesville/Bossier and Barnett natural gas shale plays.
The company also remains focused on its asset monetization
initiatives as it is trying hard to minimize capital expenditure
and devolve as much as $14.0 billion worth of assets in 2012 and
an additional $4 billion to $5 billion in 2013.
However, these positives are negated by the low gas price
environment that has shattered the company's financial strength.
Since natural gas accounted for about 79% of Chesapeake's third
quarter production, results are particularly vulnerable to
fluctuations in the natural gas market. The embattled Chesapeake
is trying hard to minimize capital expenditure through its
Chesapeake also exhibits a weak financial profile with huge debt
balance. At the end of the third quarter, the debt balance stood
at $15.8 billion, representing a debt-to-capitalization ratio of
Hence, given the weak natural gas price scenario, we believe that
the stock will perform in line with the group. Chesapeake − the
largest U.S. natural gas producer after
) − holds a Zacks #3 Rank, which is equivalent to a Hold rating
for a period of one to three months.