3 Reasons Why Chesapeake Energy Is on the Verge of a Comeback

The battered energy giant has seen its share of woes, but its latest earnings report highlights corrective measures that are putting the stock on the road to recovery.
By Siddhi Bajaj ,

Times have been tough for Chesapeake Energy (CHK) - Get Report , and analysts have made plenty of downgrades and cuts to their price targets on this stock in recent months.

But the greatest profits are made when you bet against the conventional wisdom and spot trends when others can't see them. And tangible signs are emerging that Chesapeake is on the verge of a comeback.

Deplorable financials and a general weakness in oil and gas prices have weighed heavily on the company, taking Chesapeake Energy's stock from its November 2014 high of $24.43 to less than $7.50 right now.

CHK data by YCharts

But Chesapeake's third-quarter results, reported this week, showcase a steadfast initiative on the part of management to get its act together. Add the bottom that natural gas prices have seemed to hit, and you have a company that's ready for a strong resurgence.

Here are three reasons why you should consider Chesapeake:

1) Silver Linings in the Company's Financials

The net loss in the third quarter was $4.7 billion, vs. a profit of $169 million in the same quarter a year earlier. The adjusted net loss per share of 5 cents was in stark contrast to the EPS of 38 cents in the third quarter of 2014. Still, the adjusted net loss per share of 5 cents wasn't as bad as the 13-cent loss per share that analysts were expecting.

In a similar vein, revenue for Chesapeake was down (as expected), though the slump wasn't as bad as predicted. The decline was in essence a manifestation of the pressure exerted by oil and gas prices, which have had a massive debilitating impact on the industry across the year.

Continuing its trend from last quarter, the company wrote down the value of nonviable assets, primarily oilfields, to the tune of $4.5 billion.

Having said that, the company's operational numbers have shown a significant bump. Production totaled 667,000 barrels of oil per day, a year-over-year rise of 3%. Additionally, Chesapeake cut $200 million in expenses, a move that helped trim losses.

Natural gas resides at the center of the company's production pie at 72%. In the third quarter, Chesapeake recorded an average realized price for natural gas at $1.14 per thousand cubic feet, down from $2.09 in the period a year ago, but 13% higher than the $1.01 recorded in the second quarter.

Additionally, the company managed to shave off 10% of production and general and administrative expenses compared to the previous quarter.

2) Prudent Cost-Cutting and Other Corrective Measures

With improvements in the latest quarter, Chesapeake looks to get its head down and stick to the tried-and-tested recipe of managing costs and capital expenditures.

The company recently revisited guidance for the year for production expenses to a range of $4.25-$4.50 per barrel of oil equivalent, down from the previous quarter's guidance of $4.40-$4.90 per BOE. In terms of general & administrative expenses, the renewed range is 75 cents to 85 cents per BOE for the year, compared to $1.25-$1.35 per BOE, as per the earlier guidance. The company has also lowered its 2015 guidance on capital expenditures by $100 million to $3.4 billion-$3.9 billion.

With the decision to lay off 15% of its workforce and a dividend suspension, Chesapeake is rigorously focused on a comeback.

3) There Are Signs That Natural Gas Prices Have Bottomed

A turnaround in natural gas prices could be in the offing. Over the past year, natural gas prices have dramatically fallen from around $4.1MMBtu to $2.313MMBtu, mainly on the back of a supply glut in the market and the threat of warmer temperatures during peak seasons in the U.S.

However, looking forward, the U.S. Energy Information Administration suggests that the demand for natural gas in the U.S. will rise to 76.4 billion cubic feet per day in 2016, as against 76.2 Bcf/day in 2015 and 73.1 Bcf/day in 2014. A small increase, but a rise nonetheless.

Another factor that will probably reverse the price slump is the expectation of higher liquefied natural gas exports from the U.S. to Asia and Europe, reducing oversupply. Further, natural gas companies stand to benefit when it comes to pricing, because these countries spend three to four times more on natural gas than the U.S.

Lastly, it's important to remember that Chesapeake isn't a lone warrior left out in the cold. No company has been spared in this space, with competitors such as Cabot Oil and Gas, Southwestern Energy, Rice Energy, Eclipse Resources, and Range Resources all succumbing to a bloodbath amid the rout in commodity prices. That said, given recent measures, Chesapeake Energy is clearly determined to turn itself around.

At current prices, Chesapeake is a steep bargain that could pay off in a big way for patient investors who act early.

Conversely, here's a list of 29 doomed stocks that stand no chance of mounting a comeback. If you own any of these dangerous stocks, dump them now. Click here for a complete list.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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