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Why Chesapeake Energy Corporation Stock Blasted Higher

By Sean Williams - Oct 16, 2014 at 1:59PM

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Chesapeake Energy stock is among today's top gainers after announcing a mammoth asset sale to a rival. Is this deal truly as lucrative as today's share price move would indicate?

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Chesapeake Energy (CHKA.Q), a producer of natural gas, natural gas liquids, and oil within the United States, shot out of a cannon and zoomed higher by as much as 18% after announcing a large well sale to Southwestern Energy (SWN 5.24%).

So what: According to Chesapeake's early morning press release, it is selling 435 wells in the Southern Marcellus shale and Utica shale formations, spanning approximately 413,000 net acres, to Southwestern Energy for $5.375 billion. Per the release, the average daily production for the month of September from the active wells involved in this sale was approximately 56,000 barrels of oil equivalent. The deal is expected to close sometime in the fourth quarter.

Now what: For more than a year now, Chesapeake has made paying down its debt and shedding noncore assets its top priority, and today's sale to rival Southwestern Energy demonstrates just how serious the company is in its efforts to reduce its leverage. Through last quarter, and looking back two years, Chesapeake has reduced its GAAP debt by 7% and chopped more than one quarter off of its leverage. This deal will go a long way toward putting a dent in its remaining $11.6 billion in debt as of the end of the second quarter.

Source: Chesapeake Energy.

Best of all, Chesapeake continues to stick by its production guidance thanks to production growth in other shale formations, such as Haynesville and Niobrara.

Long story short, Chesapeake was already cheap prior to this sale, and with a smaller debt load, it should look even more attractive than before. If you're looking for solid values in the energy sector, I think you certainly could do a lot worse than Chesapeake Energy.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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