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Chesapeake Energy: Don't Miss This Positive

Summary

Chesapeake Energy has gained momentum of late due to its moves to improve the balance sheet by retiring near-term debt and selling more assets, but there are more positives.

Chesapeake has consistently brought down cash costs in the last six quarters by increasing lateral lengths, leading to more low-cost production and improving rates of returns.

Chesapeake will further improve its cumulative production and lower development cost per foot by enhancing lateral length by another 13% this year.

Due to an optimized completion process, Chesapeake’s ROR in the Eagle Ford this year is expected to range between 25% and 65%.

The weaker-than-expected results that were posted a couple of weeks ago have not affected Chesapeake Energy's (NYSE:CHK) momentum on the stock market. In fact, over the past couple of weeks, Chesapeake shares are up over 17% even though the company missed the revenue estimate by a whopping $330 million in the second quarter, while also missing the bottom line estimate by $0.03 per share.

A key reason why investors have remained upbeat about Chesapeake despite its weak results is because of the efforts undertaken by the company to lower debt and improve liquidity. For instance, the company now expects to sell assets worth more than $2 billion this year, up from its initial target of $1.2 billion to $1.7 billion.

Additionally, it has received a five-year term loan worth $1.5 billion to retire senior debt that is falling due between 2017 and 2038, thereby allowing it to meet near-term debt maturities. As a result of such balance sheet maneuvers, Citigroup recently upgraded Chesapeake Energy's price target as it believed that the company is about to turn around. But, apart from these balance sheet moves, another reason why I believe Chesapeake Energy is a turnaround play is because of its sustainable cost reductions.

Chesapeake's lower cash costs will...


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