What Will the New Chesapeake Energy Look Like?

In June, Doug Lawler took over as Chief Executive at Chesapeake Energy (NYSE: CHK  ) . With a new capitan at the helm, big changes are in store for the troubled natural gas company. But what will 'New Chesapeake' look like under Lawler's leadership? 

Regime change
Chesapeake's downfall has been well-publicized. Under former Chief Executive Aubrey McClendon, the company's business model centered around buying and flipping land that contained gas rather than selling the gas itself. At its peak, Chesapeake had leased some 15 million acres financed in large part by junk bonds and complex partnerships . The company was a land acquisition machine, buying vast tracks of drilling rights before rivals entered the area.  

McClendon summarized the company's business model in a conference call with analysts back in 2008, 'I can assure you that buying leases for X and selling them for 5X or 10X is a lot more profitable than trying to produce gas at $5 or $6 per million cubic feet.' 

The model worked so long as commodity prices stayed high and credit remained easy. But when the bottom fell out of natural gas prices in 2011 the company found itself saddled with too much debt. Combined with several governance scandals, McClendon soon found himself jettisoned from the company he created. 

Enter Doug Lawler, a former executive from Anadarko Petroleum, who became tasked with turning Chesapeake around. 

What will 'New Chesapeake' look like?
Lawler's first task was to completely purge the old guard from the company's executive ranks. In August, he let go four top Chesapeake managers to be replaced with former colleagues from Anadarko. The new faces are symbolic of the new philosophy now governing Chesapeake. The company is no longer the land speculator. The McClendon years are over. Rather, "New Chesapeake" is focused on becoming a top-tier operator. 

The next step, in Lawler's view, is to end Chesapeake's reckless spending habit. Lawler is planning to slash capital expenditures in half during 2013. Management has designated more than 80% of its capital budget to drilling and completion activities in order to generate quick cash flow. 

Chesapeake has had better than expected success in cutting operational expenses. At the company's Oklahoma City headquarters, general and administration costs have fallen 26% year-over-year. Good reports are also coming in from the field. Per-unit production expenses fell 20% last quarter due to substantial reductions in well cost and spud-to-spud cycle times. 

Chesapeake is also going to look a lot oiler than in years past. The company is targeting liquids rich plays where it can generate a higher return on investment. Much of this is going to come from places like the Eagle Ford where the company reported a 135% jump in year-over-year production. Of the company's capex budget, over 70% is earmarked for liquids production. 

Targeting a more conservative balance sheet

The revamped company will also sport a more conservative balance sheet, better suited for a world of volatile commodity prices. To accomplished this, the company is selling off some prized assets in its portfolio.

In June, Chesapeake sold 425,000 net acres in the Oklahoma Mississippi Lime play to the Chinese energy giant Sinopec  (NYSE: SHI  ) for $1.02 billion. Though the deal was criticized because of its low price per acre, it was a win-win for both companies. The transaction freed up needed capital for Chesapeake while allowing Sinopec to cost-effectively expand its shale portfolio. 

In July, Chesapeake also sold assets in the Haynesville and northern Eagle Ford shale regions to EXCO for approximately $1 billion. These moves have served to close the company's funding gap and additional asset sales are expected later this year to pare down debt. 

Lawler crystallized his strategy during the company's second quarter conference call, 'Our go-forward strategic priorities will consist of two fundamental tenants; the first is financial discipline and the second is profitable and efficient growth from our captured resources.'  And while they haven't committed a timeline, management has promised to balance spending with cash flow from operations in addition to restoring the company's investment grade credit rating.

Foolish bottom line
"New Chesapeake" would hardly recognize its former self. If Lawler can pull off this turnaround, the company will emerge as a disciplined, less risky firm. Given the stock's recent appreciation, that prospect is something shareholders should be excited about. 

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