Chesapeake Energy (CHKA.Q) will release its quarterly report on Wednesday, and investors expect to see substantial growth in earnings and revenue from year-ago levels. Like EOG Resources (EOG 0.11%), Continental Resources (CLR), and other independent oil and gas producers, Chesapeake has emphasized production of oil and liquids over natural gas in recent years, but the rise in natural-gas prices over the past several months could well present a new opportunity for the company as it considers a major strategic move with its oilfield-services business.

Chesapeake was once a market darling of the energy industry, with its extensive natural-gas assets dominating its competitors and looking to capitalize on quickly rising prices for natural gas. Yet the gas glut that overtook the industry with the rise of shale-gas assets sent natural-gas prices plunging, forcing Chesapeake, SandRidge Energy (NYSE: SD), and other formerly gas-centered producers to make an about-face in their business strategies. As markets now shift back into a more balanced state, the big question facing Chesapeake is which direction to take going forward. Let's take an early look at what's been happening with Chesapeake Energy over the past quarter and what we're likely to see in its report.

Source: Chesapeake Energy

Stats on Chesapeake Energy

Analyst EPS Estimate


Change From Year-Ago EPS


Revenue Estimate

$4.69 billion

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance

Can Chesapeake earnings keep growing this quarter?
Analysts have actually pulled back on their views on Chesapeake Energy earnings in recent months, reducing fourth-quarter estimates by $0.03 per share and cutting full-year 2014 projections by more than 10%. The stock has nevertheless climbed 8% since mid-November.

Chesapeake's third-quarter results confirmed the turnaround that the company has worked so hard to achieve. Chesapeake boosted revenue by 64%, with a $0.24 per share profit reversing a year-ago loss with the help of rising prices for both oil and natural gas. Although overall production fell slightly, oil output grew by 23%, reflecting the shift Chesapeake has made away from dry gas toward liquids. Natural gas now makes up only about a third of Chesapeake's overall revenues as a result of sales of nat-gas assets, which is consistent with similar moves that SandRidge and other players in the industry have made in recent years.

But looking forward, investors aren't as certain about Chesapeake's opportunity for further growth. According to its recently released outlook for 2014, the energy company expects a 1% drop in natural-gas production, offset by 3% gains in oil and a 43% boost in gas liquids. Even though Chesapeake believes that production costs will drop 10%, that cloudy production outlook wasn't received well by shareholders, especially in combination with expectations that the company will cut capital expenditures for exploration, production, and maintenance by 20%.

Still, Chesapeake is making efforts to become as efficient as possible. By using some of the same strategies that Continental Resources and EOG Resources have used, Chesapeake has reduced its well costs and reduced its rig counts. Given that the company remains highly leveraged, these cost reductions are important to preserve Chesapeake's balance-sheet strength.

Chesapeake revealed another plan to restructure its operations just yesterday, saying that it's seeking strategic alternatives for its oil-field-services unit. By divesting itself of its rigs and its drilling and fracking services offerings through a spinoff or sale, Chesapeake could better focus on its exploration and production efforts and improve capital allocation between the two units. The move also shows the difference in strategy that new CEO Doug Lawler has had since taking over for former CEO Aubrey McClendon, looking for ways to be both shareholder-friendly and smart in getting Chesapeake leaner and meaner going forward.

In the Chesapeake earnings report, watch for more explanation of how a Chesapeake Oilfield Services spinoff might affect the continuing oil and gas business. With conditions looking better, especially in the natural-gas realm, Chesapeake could be in prime position to take maximum advantage and return to the profitability it once enjoyed.

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