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It's no secret that former-shale superstar Chesapeake Energy (NYSE: CHK ) has been a roller-coaster ride of epic proportions over the last few years. The company has experienced more booms and busts than many other firms in the energy sector. It's gone from the king of the shale hill to literally flirting with bankruptcy. Much things might be looking up for Chesapeake stock.
But in these booms and busts, Chesapeake continues to execute on its plans to reduce debt, reduce spending and live within its means. And according to its latest shareholder report, it's doing just that. There's been plenty of improvement at the Chesapeake stock.
And with energy prices for both natural gas and crude oil moving even more in its favor, Chesapeake Energy has the real potential to turn things around for good this time. It's not out of the woods just yet. But the balance between risk and reward seems to be favoring Chesapeake stock and its investors.
Chesapeake Stock Gets It Going
The story at Chesapeake Energy reads like a soap opera including secret hedge funds, activist investors, and a controversial well participation program. But what really did it in was the sheer debt it took on to become one of the nation's largest shale players.
When things were good, servicing that debt was relatively easy. However, when oil and natural gas prices tanked back in 2015 and then stayed low, Chesapeake stock was sunk.
Shares of Chesapeake Energy sank from a high of around $29 all the way down to $1.59 per share. Its bonds were trading for just pennies on the dollar.
With bankruptcy looming, Chesapeake's management had to get serious about stopping the bleeding. And that's just what they did. Asset sales, big cuts to CAPEX spending and major suspension of its dividend were all done to help get Chesapeake through the now low-oil price environment.
And it looks like those moves have worked.
During its latest reported quarter, Chesapeake actually saw a return to profits seeing a big 48% year-over-year increase. Perhaps more importantly than those profits are that cash flows for the firm also managed to surge. During the quarter, CHK managed to pull in more than $609 million in free cash flows . This represented another double-digit jump.
The reason why cash flows -especially free cash flows- are so important to Chesapeake's survival is that it should allow it to continue paying down its hefty debt burden that much faster. Right now, the firm has about $9.2 billion in total debt plus another $200 million in a revolving credit facility.
With these sorts of cash flows, CHK is hoping to retire about $2 to $3 billion of this debt . Under that scenario, the firm will be able to pay off all its near-term debt well into 2021. That will give it plenty of wiggle room for energy prices to rise further.
Chesapeake May Not Have to Wait Long
Despite the recent dip to crude oil and natural gas, prices have continued to climb during the second quarter. Thanks to rising geopolitical risks and rising demand, analysts have now raised their forecasts for the entire year.
Brent benchmark crude is now expected to average around $70 per barrel this year, while West Texas Intermediate (WTI) is expected to average $66 per barrel. Both forward estimates are about 10% higher than previously forested for the year.
This is even more bullish for Chesapeake. One of its major transitionary points has been focusing on reducing drilling costs and only tapping the lowest cost shales. This has had a positive effect on those all-important cash flows.
With margins continuing to rise, any bumps to the overall price for crude oil, natural gas or lucrative natural gas liquids (NGLs) will only help push Chesapeake Energy further along in its efforts to reduce debt and be cash flow natural. It's basically there now. But a slight push higher would even be better for the firm.
Chesapeake Energy Is Still a Big Value
In the end, things at CHK continue to get better. The firm continues to execute on its plan to reduce debt and become cash-flow neutral. With oil prices cooperating, Chesapeake Energy will have a much easier time getting that transition done. With that, the stock continues to de-risk itself with each tick higher. CHK isn't out of the woods just yet, but it has gotten better.
And because of that, shares could be a huge bargain. Right now, CHK stock can be had for a low P/E of just 4.21. Investors are literally throwing shares away because of the risks involved with its debt load and plan. But as the last quarter underscores, that plan is moving along just fine.
For those investors looking to add a bit of risk in their portfolios, Chesapeake Energy makes an ideal selection.
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