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Chesapeake Energy Is Bolstering Its Balance Sheet

Stocks in this article: CHKAPCSSE

NEW YORK (TheStreet) -- Chesapeake Energy (CHK) , the nation's second largest producer of natural gas, has been reducing its debt and selling noncore assets in an effort to strengthen its balance sheet that may draw investors to the company's stock.

Here are some of the moves Chesapeake has made during the past several months to clean up its balance sheet which became loaded with debt under co-founder and former CEO Aubrey McClendon.

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  • At the end of June, Chesapeake completed the spinoff of its oilfield-services business into a separately traded company called Seventy Seven Energy (SSE) , a move that is expected to free $1.1 billion of Chesapeake's debt
  • Chesapeake is buy backing preferred shares of its CHK Utica subsidiary for $1.26 billion, a move that will save Chesapeake $75 million a year in dividend payments.
  • In May, Chesapeake reached a deal to sell noncore assets in Oklahoma and Texas for $310 million.

At the end of the second quarter, Chesapeake's debt-to-equity ratio was 0.69, which was roughly in line with that of Anadarko Petroleum (APC) , another oil and gas producer, whose debt-to-equity ratio is 0.71.

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Shares of Chesapeake closed Wednesday at $26.33. They are down 3% for the year, compared with a 7.5% gain for the Standard & Poor's 500 Index.

Chesapeake's stock trades at 20.7 times this year's estimated earnings, compared with a forward price-to-earnings ratio of 18.5 for the S&P 500.

So the stock isn't a bargain, but with Chesapeake taking steps to repair its balance sheet, it's one that investors may want to consider.

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

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

TheStreet Ratings team rates CHESAPEAKE ENERGY CORP as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate CHESAPEAKE ENERGY CORP (CHK) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations and notable return on equity. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income, poor profit margins and relatively poor performance when compared with the S&P 500 during the past year."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 2.6%. Since the same quarter one year prior, revenues rose by 10.2%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Net operating cash flow has slightly increased to $1,352.00 million or 5.54% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -6.58%.
  • CHESAPEAKE ENERGY CORP has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, CHESAPEAKE ENERGY CORP turned its bottom line around by earning $0.68 versus -$1.62 in the prior year. This year, the market expects an improvement in earnings ($1.83 versus $0.68).
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income has significantly decreased by 67.1% when compared to the same quarter one year ago, falling from $581.00 million to $191.00 million.
  • The gross profit margin for CHESAPEAKE ENERGY CORP is currently lower than what is desirable, coming in at 27.56%. It has decreased significantly from the same period last year. Along with this, the net profit margin of 3.70% trails that of the industry average.

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