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Chesapeake Energy Is Making Progress

On the profits side, Chesapeake was hot. Net income was $15 million, or 2 cents per share. This compares favorably to last year's net loss of $71 million, or 11 cents per share. When excluding some one-time items, profits soared impressively to 30 cents per share, burning estimates by 5 cents.

It's hard not to be impressed by these numbers given the embarrassment this company suffered through thanks to its former CEO, Aubrey McClendon, whose tenure ended abruptly for legal reasons. It's worth noting here that it was McClendon's vision of the shale basins and their growth potential that is still paying off handsomely for Chesapeake today.

Nevertheless, there's a new sheriff in town -- albeit on an interim basis. Steven Dixon is now serving as acting CEO until a permanent replacement is found. Given how well Chesapeake performed this quarter, Dixon deserves plenty of credit, especially from the standpoint of profitability, helped (in part) by aggressive expense controls this quarter where costs fell almost 20% year over year.

Here's something else to consider: The fact that the company uses techniques like drilling multiple wells from a single drilling pad to increase efficiency demonstrates the commitment Chesapeake now has towards profitability. But I wonder how long the company can look at efficiency strategies such as this while also maintaining a healthy balance of increasing output.

To say it more plainly -- although I appreciate the company has heavy debt burdens to the extent of more than $13 billion in long term maturities, production growth can only come from spending. Perhaps this is what the Street has realized given the 16% decline that the stock has suffered since peaking at just under $23 per share.

Bottom Line

If there are any legitimate concerns about Chesapeake today, it centers more on the health of the overall sector and not so much about the company's performance. Chesapeake is in a business that presents a critical need and, eventually, the costs of natural gas and shale demand will normalize.

In the meantime, there will be short-term volatility in the stock. Still, at today's prices, Chesapeake seems fairly valued.

At the time of publication, the author held no position in any of the stocks mentioned.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.
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