Thanks to years of wild spending on land and new wells, Chesapeake Energy (CHKA.Q) vaulted up the leaderboard and became one of America's largest gas producers -- second only to ExxonMobil (XOM 0.39%). That rapid growth fueled an explosive rise in its stock price until oil and gas prices came crashing down, which knocked Chesapeake Energy to the brink of bankruptcy. However, by undertaking a score of strategic initiatives, the company has shored up its balance sheet, which now has it in the position to thrive at lower commodity prices. In fact, the company is planning to expand output by 5% to 15% annually through the end of the decade if prices cooperate.
That outlook has investors growing bullish that Chesapeake Energy could fuel profits into their portfolios in the coming years. That said, as compelling as Chesapeake Energy's upside potential is, Devon Energy (DVN 0.84%) and EQT Corp (EQT 0.03%) expect to grow at a much faster pace in the coming years. Even better, those companies can do so with less risk, which should cause Chesapeake Energy bulls to take notice.
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Similar shale plays, but with a top-tier balance sheet
One of the reasons investors are bullish on Chesapeake Energy is that it holds significant acreage positions in many of the country's fastest growing shale plays. However, one of the hindrances holding the company back from developing those assets is the debt on its balance sheet. While the company has cut debt by $2.6 billion over the past year and a half, it still has $9.1 billion remaining, which is too much debt for a company of its size in the current market environment.
That's why investors who like Chesapeake's exposure to several shale plays should love Devon Energy since it also holds significant positions in most of the top shale plays, including the STACK play of Oklahoma, which is one of Chesapeake's emerging growth engines. In fact, Devon Energy controls the largest acreage position in the STACK, which when combined with its Permian Basin position, should fuel 13% to 17% oil production growth this year, and 20% growth in 2018. Contrast that with Chesapeake Energy, which only expects to deliver 10% oil growth this year, and that's off a lower base.
One of the reasons Devon Energy can grow at a faster pace in the current market environment is its top-tier balance sheet. In fact, Devon has only slightly more debt at $10.3 billion but produces twice as much oil and gas as Chesapeake does on a daily basis. Furthermore, the bulk of its production comes from higher-margin liquids, which gives it more cash flow to cover its debt. That combination of greater growth with less financial risk makes Devon worth a closer look.
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The emerging natural gas leader
While Chesapeake Energy is currently the nation's No. 2 gas producer, it will drop down a notch after EQT Corp (EQT 0.03%) completes its recently announced acquisition of Rice Energy (NYSE: RICE), which will vault it ahead of oil and gas behemoth ExxonMobil. Driving that ascension is the fact that the transaction will combine two of the leading producers in the fast-growing Marcellus and Utica Shale plays. That said, for EQT this deal isn't about getting bigger but getting better. It will enable the company to earn higher returns from new wells since it will be able to drill longer horizontal wells on the combined acreage. In fact, EQT expects that its drilling returns will jump from 52% to 70% just by increasing well length.
Those higher drilling returns should enable EQT Corp to grow at a faster pace without spending any more capital. According to the company's projections, it can increase production by a more than 20% compound rate through the end of the decade, which trounces Chesapeake's forecast. Furthermore, EQT can finance that growth while living within cash flow, enabling it to maintain an investment-grade balance sheet. That combination of robust returns-driving growth with less financial risk makes it a compelling option for risk-averse investors.
Investor takeaway
After nearly collapsing under the weight of its debt last year, Chesapeake Energy has come roaring back, thanks to a significant improvement in its financial situation and growth prospects. That said, as compelling as Chesapeake Energy might be for investors, Devon Energy and EQT Corp offer faster growth with lower risk because of their stronger balance sheets. That's why investors who are bullish on Chesapeake should take a closer look at what these two energy stocks have to offer.
