Chesapeake Energy Needs More Catalysts for Upside

After a speculative spike caused by the harsh winter weather, natural gas prices have pulled back somewhat. This means that producers that were not able to meaningfully increase their liquids production find themselves at a disadvantage. This is true for Chesapeake Energy (NYSE: CHK  ) , which is the second largest producer of natural gas in the U.S. However, the company is making efforts to simplify its asset base and focus on profitability. Will those efforts turn into a higher share price for Chesapeake?

Improved balance sheet
Chesapeake finished the fourth quarter with $837 million of cash on the balance sheet, which is an achievement given the fact that the company had just $33 million of cash at the end of the first quarter of 2013. Chesapeake increased its liquidity with the help of a sell-off. The company's asset sales totaled $4.4 billion in 2013, but its debt remained high at $12.9 billion.

However, the big picture starts looking better as the company's operating cash flow will mostly cover its capital spending this year; not something investors are used to seeing with this company. Management expects operating cash flow of $5.1 billion-$5.3 billion, while capital expenditures are projected to be $5.2 billion-$5.6 billion. Yes, Chesapeake targets just 2%-4% growth in absolute production, but this growth is looking more and more sustainable.

The company will continue its selling streak this year, targeting asset sales of $1 billion. In fact, it has already announced that it will sell its midstream compression assets to Access Midstream Partners  and Exterran Partners  for $520 million. The proceeds of assets sales will further strengthen the balance sheet.

Natural gas realized prices remain a problem
The actual realized natural gas prices could be lower than the benchmark price. In Chesapeake's case, realized prices were significantly lower in 2013. The company sold its natural gas for as low as $2.22 per thousand cubic feet (mcf). In comparison, EOG Resources' (NYSE: EOG  ) natural gas realized price was $3.32 per mcf last year, while Range Resources (NYSE: RRC  ) natural gas realized price averaged $3.08 per mcf.

These prices are still low, and EOG stated that it significantly slowed development of the gas-rich Marcellus Shale in 2013. In fact, the company drilled just four net wells during the whole year. Marcellus shale's prices continue to suffer from production overcapacity. As a result, Range Resources' natural gas realized price in the area averaged $2.59, significantly lower than the company's total average realized price.

Notably, Chesapeake is heavily involved in the production in the area. During the earnings call, the company stated that it saw a very significant improvement in the pricing. However, it's too early to say whether those improvements will be sustainable.

Bottom line
Chesapeake's strategy to sell non-core assets and simplify its business was a success in 2013, which helped its shares score a healthy gain. However, the company needs more catalysts to continue this trend. The targeted production growth is not enough to cause great optimism among investors.

The debt level remains high. What's more, it is unlikely to be reduced in the near term, as company's operating cash flows will be swallowed up by capital spending. Better pricing could help Chesapeake, but I would not bet on major sustained improvements over the near term.

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