New Reasons To Be Bullish On This Energy Company

Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Chesapeake Energy (NYSE: CHK) is making a comeback. To many, this may sound like a premature statement, but despite being knocked down several times, this energy company is far from being down for the count. Chesapeake has about $16 billion in long-term debt, which is up from $11 billion last quarter, but the company is shooting for reducing that number to about $9.5 billion by the first part of 2013.

Chesapeake has pledged to sell up to $14 billion in assets this year, but there have been some delays in the expected closing dates. One pending deal is the Global Infrastructure Partners' planned $2.7 billion purchase of some of Chesapeake's natural gas gathering and processing equipment, or so-called midstream assets. The company had recently gone to Jefferies & Company, a company CEO and President of Chesapeake Energy, Aubrey McClendon, had called on years ago for financing, and Goldman Sachs for an emergency $4 billion unsecured bridge loan, at 8.5 percent interest, to give the company a lifeline until it could sell enough assets to keep afloat. The company is expected to pay back the entire loan this year using money from recent sales.

But beyond the selloffs, deal making, and loan paybacks, Chesapeake is still a producer. The company hit it big in the natural gas world when it drilled in the Haynesville Shale play, a gas-rich vein of dense rock that overlaps Louisiana and Texas, where Chesapeake had at its peak 38 rigs and over 1,200 wells. The company, like other natural gas exploration companies, is awaiting an increase in demand as well as priceExxon Mobil (NYSE: XOM) invested heavily into the world of gas purchasing XTO Energy for $41 billion in 2010. Exxon Mobil CEO, Rex Tillerson, announced this past summer that, "We are all losing our shirts today. We're making no money. It's all in the red." But that is what many other natural gas producers can say as well today, including Quicksilver Resources (KWK), which focuses primarily on unconventional reservoirs, such as fractured shale, coal beds, and tight sands.

Chesapeake has total proved reserves of approximately 2.8 trillion cubic feet of natural gas equivalents. In the past 15 years, Chesapeake Energy spent more than $31.2 billion to acquire oil and gas properties, mostly in shale formations around the United States. That amount increased the company's long-term debt to about $13 billion, close to its market capitalization of about $14 billion. But the company is in a prime position to capitalize on a culmination of events beginning next year that include forecasts for lower spending, a projected increase in natural gas demand and prices, and that fact that the market is beginning to like Chesapeake Energy again--- the price/earnings ratio of 7 is dramatically lower than the market as a whole P/E of 15. I believe Chesapeake Energy to be the company to buy now to "get while the getting is good," and hold on for a better, smoother ride.

It is obvious that what the world of natural gas producers really need is more demand for the gas. Electric utilities are switching from coal to natural gas passing on savings to consumers and companies and municipalities are deploying thousands of new gas-powered trucks and buses, curbing noxious diesel fumes and reducing the nation's reliance on imported oil. There are new uses coming online that seem hopeful such as fertilizer and chemical makers that use natural gas as a raw material are leaving other countries to come to the U.S. to be closer to gas facilities.

Chesapeake Energy recently announced the CNG in a Box System that allows easier adoption of compressed natural gas (CNG) refueling options for large- and small-scale retailers. A vehicle fleet operator that uses the CNG in a Box system for natural gas fueling instead of traditional gasoline fueling can save about 40 percent in fuel costs. The CNG in a Box system is a plug-and-play on-site fueling solution that comes with everything retailers need to add low-cost natural gas fuel to their operations.

Still, these innovations are not enough. The glut of gas continues affecting producers like Cabot Oil & Gas (NYSE: COG) that is sure to profit along with Chesapeake Energy once prices begin rising again. Cabot hit it big this past September when it reached a production level of 752 Mmcf during one 24-hour period at its Marcellus play. Chesapeake Energy continues to strive for improved uses of the gas in the market. A Chesapeake Energy backed company and Oxford Catalysts Group (OCG.L) are planning U.S. factories to make diesel, gasoline and jet fuel from natural gas. Their goal is to, within two years, make motor fuels more cheaply and easily than oil-based products produced at giant refineries. The conversion has been done before by competitor Royal Dutch Shell (NYSE: RDS-A) in their Qatar plant. One of the supermajors, Shell converts natural gas to liquids providing cleaner-burning fuels, and also extracts bitumen from mined oil sands and converts it to synthetic crude oil.

Chesapeake Energy stated in its 2012 third quarter report that daily average production was up 24% year-over-year and 9% sequentially. Liquids made up 61% of production revenue, which is up from 31% a year ago with daily average oil production up 96% year-over-year and 21% sequentially. In regards to natural gas, the company reported that it is down to its target of just nine rigs drilling, with five in Northern Marcellus, two in the Barnett, and two in the Haynesville.

This was a remarkable undertaking with selloffs since just last year the company was running as many as 81 natural gas rigs. This urgency on Chesapeake Energy's part is creating a leaner company to build upon. The company reported third quarter 2012 earnings of 0.10 per share, and third quarter 2012 revenues of $2.970 billion, 12.36% below the prior year's third quarter results. The company had little change in net income (from $1.774 billion to $1.742 billion) despite revenues that grew 24.23% from $9.366 billion to $11.635 billion and has a debt to total capital ratio of 47.11%, a lower figure than the previous year's 72.33%.

With a leaner structure, a reduced debt load, and increased production in liquids, Chesapeake Energy is on its way to producing even greater returns for investors.


jordobivona has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.

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