Chesapeake Energy: Stay Long for More Gains

The negativity around Chesapeake Energy (CHK) stock is due to worries regarding its debt. But, Chesapeake has already reduced its debt by a big margin and is on track to bring down the net debt further. This should allow investors to focus more on Chesapeake’s operational improvements, which have allowed the company to record a strong improvement in its earnings before interest and taxes over the past few months.

Even though Chesapeake’s EBIT is deep in negative territory, the company has achieved an impressive turnaround in this metric since the turn of the year.
This improvement has not been entirely driven by a recovery in natural gas prices, which have started gaining momentum of late. Since Chesapeake has managed to bring down its cost structure aggressively, it has now become a more efficient operator and this is positively impacting its financials.

So, in this article, we will take a closer look at the steps being undertaken by Chesapeake to lower the cost structure and see how they are helping the company get better.

Chesapeake’s smart cost reductions are bearing fruit

Chesapeake has a laser-like focus on reducing costs this year. More specifically, the company is looking to lower its gathering and transportation costs by entering into negotiations with midstream and downstream partners, apart from lowering the base decline rate of its acreage by at least 10% on the back of efficiency improvements. Moreover, in a tight natural gas pricing environment, Chesapeake has focused on those assets that will help it generate positive cash flow in the short run, which is why its focus is entirely on lowering production costs.

The important part is that Chesapeake has made impressive progress as far as reducing costs are concerned. The company is on track to lower general and administrative costs by at least 10% this year, apart from a 10% decline in lease operating expenses. Now, Chesapeake had already delivered more than its expectations in the first quarter, lowering cash costs by 28%, or $100 million, on a year-over-year basis.


With oil and gas prices now picking up momentum, it is quite likely that Chesapeake’s key financial metrics will start picking up pace going forward. This will help the stock make a recovery on the market due to its lower cost base. So, I think that investors should not overlook this positive development at Chesapeake Energy as this might turn out to be a long-term catalyst.
Published on Jul 7, 2016
By Yaggyaseni Mittra

Copyrighted 2020. Content published with author's permission.

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