Big Opportunity Ahead for Chesapeake Energy?


Chesapeake Energy has been through a lot this past year. Management scandals aside, low natural gas prices have taken a major toll on the company, exacerbating its poor debt situation. To help shore up its sizable funding gap, the company has resorted to large-scale asset sales.

Earlier this year, it sold off a hefty chunk of its assets in the Permian Basin to SWEPI LP, a subsidiary of Royal Dutch Shell , Chevron , and a private Houston-based company called EnerVest, receiving net proceeds of roughly $3.3 billion from the three transactions.

And more recently, Plains All American announced it would purchase Chesapeake's assets in Texas' Eagle Ford shale for $125 million. The deal with Plains came on the heels of another transaction with Access Midstream Partners , to whom Chesapeake will sell a "substantial majority" of the midstream assets it has left, bringing in roughly $2.16 billion in cash.

Assuming that the deal is closed this month, Chesapeake should end the year with around $10.8 billion in asset sale proceeds, with another $425 million worth of proceeds expected to come in next year in the first quarter. But will it be enough?

To address this critical question and many more, I created a premium research report on this beleaguered gas producer. Hopefully, the report should help investors get a better picture of Chesapeake's future. It includes opportunities, major risks, crucial areas to watch, and a closer look at the company's management.

The following is an excerpt from the report that briefly lays out Chesapeake's opportunities. It's just a sample of one section, but I hope you find it useful.

The Opportunity
A Revamped Business Strategy

To combat gas prices that have rendered most U.S. gas wells uneconomical, Chesapeake is focusing on ramping up its liquids production, while monetizing non-core assets to raise cash.

The company's overarching focus is highlighted by its clear-cut "25/25 Plan" for 2011-2012, which aims to reduce long-term debt 25% by the end of 2012, while maintaining a two-year production growth rate of 25%. Long-term debt will be reduced primarily through various asset monetizations and through major reductions in leasehold spending.

While the company's debt levels and its vulnerability to a prolonged period of low natural gas prices are grave concerns, there is one undeniable fact that should mitigate these worries to some extent: Chesapeake has a ton of high-quality assets.

Despite numerous asset sales in 2012, it still boasts a vast and high-quality portfolio, with positions in 10 major onshore plays, including the Eagle Ford Shale, the Marcellus Shale, the Utica Shale, the Anadarko Basin (Granite Wash, Cleveland, Tonkawa Tight Sands), the Mississippi Lime, the Powder River Basin Niobrara Shale, the Haynesville/Bossier Shale, and the Barnett Shale.

More importantly, even after accounting for prior and expected asset sales through 2013, Chesapeake's net asset value may be many multiples of its share price.

The company believes its net asset value, after accounting for non-core asset sales, to be in the $50 billion-$60 billion range, which corresponds to a per-share value of $75-$90. Even more conservative estimates by analysts at Oppenheimer & Co. suggest a net asset value between $22 billion and $37 billion, or $39-$63 per share.

Given that shares of Chesapeake reached a high of just under $26 a share and a low of just under $14 a share in 2012, it's safe to say the company remained anywhere from deeply undervalued to significantly undervalued based on this metric.

Does this suggest that Chesapeake may be able to pull off a drastic turnaround? It's tough to say.

All else being equal, a turnaround can only typically be achieved through a dramatic realignment of the company's strategy in response to changing market conditions. In this respect, Chesapeake's progress thus far has been impressive. Let's take a look at four key areas investors should find useful to monitor.

Interested in other opportunities and risks facing Chesapeake?
That was just a sample of our new premium report on Chesapeake Energy. If you're debating whether the company is a buy or a sell, the report may prove to be a crucial resource. In addition to an analysis of Chesapeake's risks, areas to watch, and management, the report comes with complementary updates and delves into upside and downside catalysts looming on the horizon. To get started, simply click here now.

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Fool contributor Arjun Sreekumar has no positions in the stocks mentioned above. The Motley Fool has options on Chesapeake Energy. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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