On Wednesday, Chesapeake Energy (CHKA.Q) will release its quarterly report, and investors have been pleased with the progress that the stock has made in recent months. Favorable trends in natural gas prices have helped bolster Chesapeake as well as SandRidge Energy (NYSE: SD) and other smaller players in the industry. But with recent allegations against both it and peer Encana (OVV -1.17%), Chesapeake faces a new threat that could keep it from taking maximum advantage of improving conditions for the oil and gas producer.

Chesapeake Energy has suffered through the past several years, as plunging natural gas prices forced the company to make dramatic moves to sell assets and reduce its exposure to natural gas in favor of oil and gas liquids, which have enjoyed more stable pricing. Yet now, with natural gas on the rebound, the question is whether Chesapeake should start moving back in the other direction and ramp up gas production or whether it should remain cautious until a more obvious long-term price trend asserts itself. Meanwhile, many investors are paying close attention to potential legal disputes that could damage Chesapeake's long-term prospects. 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

$4.45 billion

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance.

Can Chesapeake earnings keep climbing higher?
Analysts have been downbeat on Chesapeake earnings prospect in recent months, cutting first-quarter estimates by a nickel per share and reducing full-year 2014 projections by more than 10%. The stock, though, has done reasonably well, rising 5% since late January.

Chesapeake Energy disappointed investors with its fourth-quarter earnings report, with earnings falling well short of what investors had hoped to see. Production declines weighed on Chesapeake's results, although some of that reduction was a deliberate decision in order to accommodate the challenges of transporting products from hard-to-reach areas. Like SandRidge Energy, Chesapeake has also been working to boost its exposure to oil and gas liquids, which is more difficult for it than for some of its peers because of Chesapeake's past emphasis on dry gas production.

Source: Chesapeake Energy.

Yet Chesapeake Energy has continued to make moves to divest assets and refocus itself on its best production opportunities. In February, Chesapeake said it would sell more than 400 midstream compression units to two different companies for $520 million, with the sales seen closing by the end of the current quarter. All told, Chesapeake expects to sell a total of $1 billion in assets this year. Chesapeake also filed to spin off its oil-field services unit in March, utilizing another popular method of moving assets by distributing them in a separate business to shareholders.

Still, Chesapeake spooked investors recently by saying it expects oil production growth to decelerate this year. Yet Chesapeake still sees 40% to 45% gains in natural gas-liquids production this year, and given Chesapeake's reduced capital spending budget, the drop in oil growth rates shouldn't affect overall production too adversely. Moreover, the latest legal issues have created even more uncertainty, as both Chesapeake and Encana were cleared of antitrust allegations by the Justice Department but still face potential issues in the state of Michigan for allegedly colluding to reduce the amount they had to pay landowners for leases. Moreover, Chesapeake lost a separate dispute with landowners in Texas last week, and numerous legal issues could pose a threat to the company well into the future.

In the Chesapeake Energy earnings report, watch to see how far realized natural gas prices rise. Given the rough winter, the hope is that Chesapeake's earnings will rise substantially. Even if the full extent of those gains proves unsustainable, it will still mark a good result for Chesapeake's long-term prospects.

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