We reaffirmed our Neutral recommendation on
Chesapeake Energy Corporation
) on Jun 14, 2013. The company's focus on the liquid-rich plays
like Utica Shale is expected to contribute highly to its growth
momentum going forward. However, a weak financial profile with
huge debt balance remains a major concern.
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Chesapeake - an independent oil and gas company - registered
higher production on lower operating costs from its underlying
assets during the first quarter.
Chesapeake plans to invest heavily in the development of its
liquids-rich holdings in the Eagle Ford Shale, Granite Wash and
Mississippi Lime. Most importantly, the company's efforts seem to
produce desirable results, reflected by almost 56% year over year
increase in average daily oil production during the first
Management has increased its natural gas production guidance by
25 billion cubic feet (bcf) for 2013 mainly on the back of strong
well results in the Marcellus. But management reduced its natural
gas liquid (NGL) production guidance by 1 million barrels
(mmbbls), to reflect infrastructure delays and a shift in its
drilling activity towards more oily plays.
The company also increased its full-year 2013 production guidance
to 3,965 MMcfe/d up 2% from its earlier guidance of 3,895
MMcfe/d. The growth drivers were higher-than-expected oil output
from the Eagle Ford as well as gas yield from the Marcellus and
improved liquids volumes.
Chesapeake is on track with its plan of reducing long-term debt
by monetizing its assets and cutting lease-hold spending. This
monetization initiative is mainly aimed at coping with the
mounting debt level as well as filling the funding gap for its
2013 expenditures that resulted from low natural gas prices.
However, Chesapeake's results are particularly vulnerable to
fluctuations in the natural gas market, since natural gas
accounted for about 76% of Chesapeake's first quarter production.
The company has been in news of late as it is struggling to fund
its capital budget amid diminishing cash flows in a weak natural
gas price scenario.
Other Stocks to Consider
While we prefer to remain on the sidelines for Chesapeake, there
are other Zacks Ranked #1 (Strong Buy) stocks -
Hornbech Offshore Services, Inc.
Newpark Resources Inc.
Gulfmark Offshore, Inc.
) - that are expected to perform impressively over the short