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Why Chesapeake Energy Corporation's Stock Is Soaring Today

By Matthew DiLallo – Jul 27, 2018 at 11:09AM

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The natural gas driller announced a significant asset sale.

What happened

Shares of Chesapeake Energy Corporation (CHKA.Q) surged out of the gate on Friday, rising 13% shortly after the market opened at 9:30 a.m. EDT, after the company signed a deal to sell its assets in the Utica shale

So what

Chesapeake Energy agreed to sell its entire position in the Utica shale to privately held Encino Acquisition Partners for up to $2 billion in cash. The agreement calls for a $1.9 billion cash payment at closing and includes a $100 million contingent payment based on future natural gas prices. Chesapeake expects the deal to close in the fourth quarter and will use the money to pay down debt.

A red natural gas wellhead.

Image source: Getty Images.

This transaction is significant for Chesapeake. The debt reduction alone will cut its annual interest expenses by about $150 million. It will also reduce its 2019 gathering, processing, and transportation expenses by $450 million, while eliminating $2.4 billion of future midstream commitments.

The company fully expects to replace the lost earnings from this asset within one year by growing its oil production from the Powder River Basin. Overall, Chesapeake anticipates oil output to increase by 10% in 2019, with additional growth in 2020 due to its strong drilling results in that region.

Now what

CEO Doug Lawler commented on the transaction, stating: "Today's announcement makes Chesapeake a stronger and more competitive company. By divesting our position in the Utica and using the proceeds for debt reduction, we will not only significantly improve the health of our balance sheet, but we will also accelerate progress toward our strategic goals of reducing our debt, improving our margins and reaching sustainable free cash flow neutrality."

The company continues to target getting its net debt to EBITDA (leverage ratio) down to below two, which is the goal of most peers. While the company isn't quite there yet even with this transaction, it's heading in the right direction. However, it's still a risky energy stock, so while investors with a higher risk tolerance might be intrigued, most others should consider investing in one of these top energy stocks instead.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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