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Chesapeake's Upside Is Not Limited

Summary

Chesapeake shares have been on a roll since the beginning of last week due to positive debt negotiations, and the trend will continue after the upcoming results.

Natural gas prices have held their ground in the first quarter of 2016, which is why the company's top line won’t take a major hit when it reports earnings.

Since Chesapeake has managed to reduce its debt and bring down the interest burden, its bottom line will improve on a sequential basis.

More improvements in the bottom line are possible, since the company is on track to reduce more operating costs, while further asset divestments will lead to more debt retirements.

In an article last month, I had advised investors that they should not worry too much about Chesapeake Energy's (NYSE:CHK) debt burden, since the company is pulling the right strings to reduce its debt and improve liquidity. My thesis gained strength last week after Chesapeake announced it has been able to reaffirm its $4 billion borrowing base with favorable covenants that require a lower interest coverage ratio and no limitation on the senior secured leverage ratio of the facility.

In fact, the company was able to push the next redetermination of the credit facility to June 2017. As a result of this move, Citi was prompted to upgrade Chesapeake's debt to Market Weight from Underweight. This has helped the stock gain more momentum of late, with CHK shares up 70% since the beginning of last week. But will Chesapeake be able to sustain this momentum when it releases its first-quarter results in a couple of weeks? Let's find out.

What is expected of Chesapeake?

For the first quarter that ended in March, Chesapeake Energy is expected to see its revenue decline around 7.5% to $2.55 billion. In comparison, in the fourth quarter of 2015, it had...


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