Chesapeake: A New Beginning?
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For those of you in the oil and gas stock market, it would interest you to know that come 2013, Chesapeake Energy (NYSE: CHK) is ready to surprise you as its chances for success are looking increasingly attractive and attainable. The company has successfully engaged in the selling off of its assets in order to be able to pay down most of its debt and at the same time, build reasonable capital for itself. The deal in which it sold pipelines and gas fields, worth over $6.9 billion, to Chevron (CVX) and Royal Dutch Shell (RDS.A) is completed, and this deal has helped it achieve 85% of its goal of selling $14 billion worth of assets.
According to Chesapeake CEO Aubrey McClendon, those sales are "significant steps in the transformation of our company's asset base to a more balanced portfolio among oil, natural gas liquids and natural gas resources and production." In this line, in four different deals, some land belonging to the company within the Ohio's Utica shale formation was sold for about $600 million and this leaves the company with approximately 1.3 million acres of land remaining in the Utica.
Sales of Drilling Leases and Assets
The company has also gone further to offer drilling leases for sale to Oklahoma. Within the western Colony Wash field, Chesapeake is preparing to lease or sell off not less than 28,360 net acres spanning across three different counties which are known to host up to 117 drilled wells. This does not include the company's drilling sites that are located in the Texas panhandle. This is where Apache (NYSE: APA) comes in as an example for Chesapeake to look up to. With more than a million gross acres under its control and 2,500 producing wells, Apache is really making its mark as far as the Texas panhandle and Oklahoma are concerned. A transition from vertical to horizontal drilling in this region has moved the region more toward oil and liquids-rich gas plays. Between 2010 and 2011, Apache's oil production in this region nearly doubled, while its natural gas liquids (NGL) production shot up by a staggering 244%.
Unlike what some persons may think, Chesapeake's selling off of some of its assets does not in any way spell trouble for the company. Rather, it should be seen as a way of building a solid foundation that will help the company achieve maximum success within the horizon come 2013. This means that if you are on the look out for a partnership with an oil and gas company that has a bright future, then Chesapeake is where you should be. The fact that they are concentrating more on natural gas is at their advantage because at the end of the day, it will surely be to their favor with the steady increase in the demand for gas.
Natural Gas Production
Although Chesapeake is presently maintaining a good position as the second largest natural gas producer, with ExxonMobil (NYSE: XOM) being the first, a position it achieved when it made the purchase, in 2010, of XTO Energy, Chesapeake is gearing for a huge comeback in the following year. With 79% of the company's total production for the second quarter of 2012 being significantly made up of natural gas, they are surely heading there because as soon as the price of natural gas goes up, Chesapeake will be there to rake in their huge profits. Although ExxonMobil will make their own profit, it won't be as large as what will go into the accounts of Chesapeake since a higher percentage of ExxonMobil's production is based on oil, not natural gas.
Another reason why Chesapeake will surprise brokers in 2013 is based on the fact that while ExxonMobil is supposedly increasing its earnings, especially with the recent purchase of drilling rights to 196,000 acres within Montana and North Dakota worth $2 billion and achieving a 50% increase in its presence in the Bakken, Chesapeake is assumed to be selling off some of its assets which could eventually decrease its earnings but in actual sense, it is still maintaining its hold on those acres and wells, plays that are not just rich in natural gas but rich in oil as well. One of such plays is the Hogshooter play, which is located in the Texas Panhandle. This means that when the chips are down, Chesapeake will surely be on the favorable side.
With the Hogshooter play, according to McClendon, the company wants to use it to "provide a significant boost to Chesapeake's focus on harvesting its existing assets for growth and value creation rather than on pursuing new leaseholds." With the completion of a couple of horizontal wells in this play and the planned drilling of up to 65 wells in the years to come, Chesapeake has a lot in store for the coming years than you can predict. The company stated that in the first eight days of drilling one of the wells, its production averaged 4.6 million cubic feet of natural gas, 5,400 barrels of oil and 1,200 barrels of natural gas liquids.
Net Income and Revenue
The company reported a net income of $929 million on revenue of $3.4 billion, along with an operating cash flow of $895 million, in the second quarter of 2012. It also reported production of 347 billion cubic feet of natural gas equivalent while at the same time, offering the general public a dividend yield of 1.9%. With this company being in the production of natural gas in the past 23 years and coming second to ExxonMobil with other big companies like Anadarko Petroleum (APC), Devon Energy (DVN) and BP (BP) coming behind it, Chesapeake has proven that on long term basis, it is the company to be reckoned with as far as the current rally in natural gas is concerned. Also, with its partnerships with Clean Energy Fuels (CLNE) and General Electric (GE), which is geared towards the manufacture of natural gas compressors and in turn, increase the demand for natural gas and usage, this company is headed for success at a peak that has never been reached before. Yes, in my opinion, even though it has sold off some of its assets, Chesapeake is sure to sustain the demand for natural gas, not just the coming winter months but throughout this year and the coming year.
jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of Apache and ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, short JAN 2014 $15.00 puts on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.