Next week Chesapeake Energy (NYSE:CHK) will report its third quarter results. The key to making smart investment decisions during earnings season is to prepare before a company releases its results. That way you'll be ready for any surprises.

It's been a tough go for the natural gas producer. Under the leadership of former CEO Aubrey McClendon, Chesapeake found itself saddled with an unmanageable debt load after commodity prices imploded. But last summer new head honcho Doug Lawler laid out a turnaround strategy for the troubled firm which includes selling off non-core assets, shifting to a more liquid production mix, and renewing its cost cutting efforts. For investors, this quarter will be our first chance to see how the turnaround is taking shape. 

Chesapeake by the numbers

Analysts EPS Estimate $0.41
Change From Year-Ago EPS 310%
Revenue Estimate $3.48B
Change From Year-Ago Revenue 17%
Earning Beats in Past Year 3

Source: Yahoo Finance

A completely new company
Chesapeake's most intimidating challenge has been closing its funding gap. In June, the company closed the sale of 425,000 net acres in the Oklahoma Mississippi Lime play to Chinese energy major Sinopec (NYSE:SHI) for $1.02 billion. Though the deal was loudly criticized by analysts for its low price per acre, the deal was a real win-win for both companies. The transaction freed up much-needed capital for Chesapeake. At the same time, the acquisition allowed Sinopec to cost-effectively expand its position in the U.S. shale boom. 

Then in July, Chesapeake sold its assets in the northern Eagle Ford and the Haynesville shale plays to EXCO Resources for $1 billion. The move fully closed the company's funding gap. Investors should listen to see if there are plans to sell off additional assets to further pare its debt load. 

This quarter Chesapeake also completed a major reorganization. In August, four executives were terminated, thereby eliminating the last reminders of the old McClendon regime. Then last month, the company announced the layoff of 900 employees. Chesapeake will take a one-time charge of $70 million to cover expenses related to these layoffs over the next two quarters. 

Can Chesapeake turn it around?
All of these activities are great developments for shareholders, but the real test from the company's turnaround will require revamping operations in the field and not just cutting headcount at headquarters. This will require transition away from low-return dry gas production and into natural gas liquids and oil in order to boost profits. 

In some respects the company has already had success on this front. In 2009, dry gas accounted for over 90% of Chesapeake's production. By the end of 2012, that metric had fallen to 78% of output. Expect that figure to fall further now that management has allocated over 80% of its capex budget to NGL and oil-rich plays like the Texas Eagle Ford. 

The other thing investors want to see is a timetable for this entire turnaround effort. During the company's last conference call, Lawler promised to balance Chesapeake's capital expenditures with cash flows from operations and regain an investment grade credit rating. However, he gave no schedule for when investors can expect these goals to be achieved. Fair enough, Lawler only took the helm at the company this spring. But investors should be looking for some sort of time table to be nailed down during the conference call. 

Foolish bottom line
Chesapeake is in the midst of an exciting turnaround. Doug Lawler has identified the source of the company's woes and a clear plan of attack to address them. However, shareholders will have to watch quarter by quarter to make sure he can execute. 


Robert Baillieul has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.