CHK

3 Things Chesapeake Energy Corporation's CEO Wants You to Know About Its Dramatic Transformation

A drilling rig near some oil pumps with a nice sunset in the background.

After going on a tear earlier in the year , shares of Chesapeake Energy (NYSE: CHK) have come back to earth over the past few weeks thanks to a string of disappointments. While the market initially reacted favorably to its decision to unload its entire position in the Utica Shale , analysts widely panned the move. On top of that, the company posted lackluster second-quarter results .

However, while Chesapeake might have had some recent disappointments, CEO Doug Lawler was decidedly optimistic on its second-quarter conference call. Here are three reasons he believes the company has a bright future.

We're not the same company we once were

Lawler led off the call by summarizing some of the company's recent wins:

He went on to state that:

This combination of debt and cost reductions have put the company on much stronger financial footing for the future, all but removing the possibility of declaring bankruptcy that was present a couple of years ago.

We're starting a new phase

Still, Chesapeake's weaker financial position forced it to spend much of its energy the past few years shoring up its balance sheet so that it could survive the oil market downturn. However, the days of focusing on staying afloat are now in the past with the sale of the company's Utica position. Lawler stated that it "marks the conclusion of Chesapeake's strategy of asset sales being the primary driver of debt reduction," even though he also pointed out that the "strategy was necessary, given the debt profile of the company."

With that focus on asset sales in the rearview mirror, the company is starting a new phase to achieve its targeted leverage level by shifting its focus to "organic production growth, exploration, strategic acquisitions, and portfolio management," according to Lawler. These efforts will "drive us to achieve our ultimate goal of improving our leverage ratio to 2.0 times net debt to EBITDA ," which is about half of its current level of around 4.0 times debt to EBTIDA.

This is how we will achieve our new strategy

As Lawler noted, organic growth will be a key driver for Chesapeake going forward. He stated that: "We expect our diverse portfolio to deliver 10% adjusted oil production growth in 2019, and additional growth is anticipated for 2020 ... principally driven from our Powder River Basin asset."

He then drilled down a bit deeper into that position:

Chesapeake has delivered stunning production growth from this region in the past few months thanks to its focus on drilling into the Turner formation. As Lawler notes, oil production is already up 90% this year and should continue growing as it completes 28 more wells by year-end. Meanwhile, the company expects oil output from the region to double in 2019 from this year's average as it continues drilling at a fast pace.

There also appears to be ample untapped upside in the region. As noted, Chesapeake has currently just focused on the Turner formation. However, rival EOG Resources (NYSE: EOG) recently revealed encouraging drilling results in the Mowry and Niobrara shale plays. Those wells lead EOG Resources to believe it can drill more than 1,800 high-return wells on its acreage in the region, unlocking an estimated 2.1 billion BOE of resources. That's a stunning 10-fold increase from EOG's initial assessment of the Powder River Basin based on its Turner potential. Those discoveries by EOG Resources as well as the renewed focus on the region by other large drillers suggest that Chesapeake could have significant upside as it explores its acreage.

The glimmer of hope is growing brighter

The sale of Chesapeake Energy's Utica Shale position marks a key turning point for the company's strategic plan. While it still has some work to do given its elevated debt level, the company made significant progress and put together an action plan to take it to its desired destination. Add that to its Powder River Basin upside, and Chesapeake Energy's future is beginning to brighten.

10 stocks we like better than Chesapeake Energy

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Chesapeake Energy wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 6, 2018

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.