Chesapeake Is Making a U-turn

Two days after Aubrey McClendon announced he would step down as Chesapeake Energy's (NYSE: CHK  ) CEO, the stock rose 6.2%. Clearly investors were excited to see the leadership change, along with other shakeups. To date, though, Chesapeake is up over 45%, and investors should be thanking former Anadarko Petroleum Corporation (NYSE: APC  ) executive Doug Lawler for the increase.

A lean, cost-cutting machine
Upon taking office, Lawler did not wait to get comfy in his new role. He took the bull by the horns and made his intentions clear: refocus an over-extended firm. And, his actions were swift. Lawler quickly cut the pork, including 10% of Chesapeake's entire workforce, including many corporate employees. Additionally, Lawler ensured Chesapeake focused on its core business by selling over $4 billion in assets that he deemed excessive. With these two tasks behind him, Lawler is preparing for long-term growth.

The stage is still being set
In addition to the above measures, Chesapeake's third quarter conference call revealed that average production expenses during the quarter decreased 10% year over year while general and administrative expenses decreased 12%. Additionally, because Lawler is emphasizing efficient, productive operations, Chesapeake spud 18.9% less gross wells and completed 21.7% less gross wells compared to its second quarter of 2013. Remarkably, though, Chesapeake's production is strong and shows signs of additional growth.

Chesapeake's daily production for the third quarter averaged approximately 4 billion cubic feet of natural gas equivalent (bcfe), a 2% decline from the third quarter of 2012, while its second quarter approximate average production was 4.1 bcfe. Additionally, Chesapeake's oil production surged 23% year over year.

So, even with massive asset sales and steep cost-cutting measures, Chesapeake's production levels are nearly equal, quite a feat.

Chesapeake's future: income and cash
Cash is a necessity for the capital intensive exploration and production industry while many investors often look to the bottom line for comfort. Both are looking good. Chesapeake reported an adjusted EBITDA of $1.325 billion, a 29% increase year over year while its operating cash flow is up 22% year over year. Additionally, adjusted net income to common shareholders is $0.43 per fully diluted share, up $0.33 from the third quarter of 2012.

Competitor Range Resources' (NYSE: RRC  ) third quarter report seemingly mirror some Chesapeake's results. Range's adjusted cash flow surged 29% compared to the third quarter of 2012 while its unit costs were cut by 12% in the same period of time. Coupling this information with a 75% increase in income and Range's 21% increase in production reveals that it is on a fast-track to new heights. Under Lawler's continued leadership and now that Chesapeake is focusing on productive wells, Range's results may be foreshadowing Chesapeake's future.

Lawler's former employer, Anadarko Petroleum, is also making headwinds but not all of them are positive. Anadarko's profit per share is $0.36, up 33% from the third quarter of 2012 while its revenue rose 16%. Interestingly, Anadarko's shares traded lower after the earnings call.   So, analysts may be stepping back to reassess the situation. But, Anadarko's operational plan is geared toward the long term. It increased its U.S. onshore sales volume by nearly 61,000 barrels of oil equivalent per day compared to the third quarter of 2012 while further expanding into the lucrative Eagle Ford play in Texas.

Additionally, Anadarko successfully drilled two appraisal wells in Mozambique that could prove to be quite fruitful. And, it increased its stake in the Coronado discovery within the Gulf of Mexico by increasing its stake form 15%-35%; it will begin operating after the next appraisal well is drilled.

Jump on the bandwagon
The third quarter conference call was further evidence that exploration and production companies, notably Chesapeake Energy, are positioning themselves for the long-haul. With the recent tailwinds and the successful implementation of refocusing strategies, Doug Lawler is positioned to take Chesapeake to the next level.

Cash is king -- follow the money
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!


Read/Post Comments (0) | Recommend This Article (1)

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.

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: 2715102, ~/Articles/ArticleHandler.aspx, 9/16/2014 3:53:26 AM

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...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement