Is Chesapeake Really Serious About Financial Discipline?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

From what I can tell, Chesapeake Energy's (NYSE: CHK  ) new CEO, Doug Lawler, is working hard to turn the company around. In mid-June, he launched a comprehensive review of the company's assets in an effort to determine the best way to unlock value for shareholders.

To achieve stronger returns, boost competitiveness, and improve Chesapeake's relative share-price performance, Lawler outlined two main priorities for the company: (1) financial discipline, and (2) profitable and efficient growth from captured resources. Let's take a closer look at what these goals mean and how Chesapeake plans to achieve them.

Chesapeake's key priorities
When Lawler says financial discipline, he's really talking about balancing the company's capital expenditures with its cash flow from operations. To achieve this goal, Chesapeake is allocating the bulk of its capital to its highest-quality and most profitable projects. At the same time, it will continue to raise additional cash through its ongoing asset sale program, while also reducing its financial and operational risk and complexity.

The second priority Lawler outlines -- profitable and efficient growth from captured resources -- simply means that the company is focusing on delivering the highest possible level of liquids production growth from its existing asset base, as opposed to acquiring new assets as it had done during Aubrey McClendon's time as CEO. Even after recent asset sales, Chesapeake still commands sizable positions and deep inventories in world-class plays such as the Eagle Ford shale and the Greater Anadarko Basin.

Chesapeake's progress in meeting its goals
Chesapeake's most recent quarterly performance highlights its commendable progress in working toward achieving these goals. On the cost reduction front, it slashed its drilling and completion costs by 35% year over year and its total leasehold and other capital expenditures by 75% year over year. For the full year, Chesapeake anticipates its capital expenditures to come in at roughly $7.2 billion, a 46% reduction from its 2012 capex of $13.4 billion.

As for oil production growth, the company increased its total oil output by an impressive 44% year over year, thanks largely to its solid operational performance in the Eagle Ford shale, where it pumped roughly 85,000 barrels of oil equivalent per day. That represents a whopping 135% year-over-year increase and cements the company's position as one of the most successful operators in the play.

Only ConocoPhillips (NYSE: COP  ) , which pumped roughly 121,000 barrels per day from the Eagle Ford during the second quarter, and EOG Resources (NYSE: EOG  ) , which produced a staggering 173,000 barrels of oil equivalent per day, bested Chesapeake. Marathon Oil (NYSE: MRO  ) came close, reporting daily net production of 80,000 barrels.

The combination of these cost-cutting measures and strong oil production growth helped deliver robust year-over-year improvements in both adjusted earnings, which jumped 77% to $1.424 billion, and operating cash flow, which increased 53% to $1.37 billion in the second quarter. As a result, the company expects to be able to fully fund its capital spending for the year through its cash flow -- a noteworthy achievement for a company that has a long history of outspending its cash flow.

The bottom line
As you can see, Chesapeake certainly appears to be on the right path to transforming into a more efficient, disciplined, and focused exploration and production firm. It is finally on track to balance its capital expenditures with cash flow from operations and finds itself in a much better financial position than at any time in recent memory.

Not only are near-term liquidity concerns fading, with the company reporting $4.7 billion of liquidity as of the end of the second quarter, but Chesapeake is also well hedged for the rest of the year and into 2014 -- a sharp contrast to its position just two years ago, when it entered 2012 without any natural gas hedges.

Profit from higher oil prices
Think the days of $100 oil are gone? Think again. Brent crude oil prices have spent most of the past year above $100 a barrel and could rise even further, especially if the geopolitical situation in the Middle East deteriorates further. To help investors get rich off of rising oil prices, our top analysts prepared a free report that reveals three stocks that are bound to soar as oil prices climb higher. To discover the identities of these stocks instantly, access your free report by clicking here now.

Read/Post Comments (0) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2668190, ~/Articles/ArticleHandler.aspx, 5/31/2016 12:24:43 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 17,783.37 -89.85 -0.50%
S&P 500 2,093.90 -5.16 -0.25%
NASD 4,935.40 1.90 0.04%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

5/31/2016 12:09 PM
CHK $4.37 Up +0.21 +5.05%
Chesapeake Energy CAPS Rating: ***
COP $44.40 Up +0.07 +0.16%
ConocoPhillips CAPS Rating: *****
EOG $81.56 Down -0.01 -0.01%
EOG Resources, Inc… CAPS Rating: ****
MRO $13.24 Up +0.34 +2.60%
Marathon Oil Corp CAPS Rating: *****