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We reaffirmed our Neutral recommendation on Chesapeake Energy Corporation (CHK - Analyst Report) on Jun 14, 2013. The company’s focus on the liquid-rich plays like Utica Shale is expected to contribute highly to its growth momentum going forward. However, a weak financial profile with huge debt balance remains a major concern.

Why Maintained?

Chesapeake – an independent oil and gas company – registered higher production on lower operating costs from its underlying assets during the first quarter.

Chesapeake plans to invest heavily in the development of its liquids-rich holdings in the Eagle Ford Shale, Granite Wash and Mississippi Lime. Most importantly, the company’s efforts seem to produce desirable results, reflected by almost 56% year over year increase in average daily oil production during the first quarter.

Management has increased its natural gas production guidance by 25 billion cubic feet (bcf) for 2013 mainly on the back of strong well results in the Marcellus. But management reduced its natural gas liquid (NGL) production guidance by 1 million barrels (mmbbls), to reflect infrastructure delays and a shift in its drilling activity towards more oily plays.

The company also increased its full-year 2013 production guidance to 3,965 MMcfe/d up 2% from its earlier guidance of 3,895 MMcfe/d. The growth drivers were higher-than-expected oil output from the Eagle Ford as well as gas yield from the Marcellus and improved liquids volumes.

Chesapeake is on track with its plan of reducing long-term debt by monetizing its assets and cutting lease-hold spending. This monetization initiative is mainly aimed at coping with the mounting debt level as well as filling the funding gap for its 2013 expenditures that resulted from low natural gas prices.

However, Chesapeake’s results are particularly vulnerable to fluctuations in the natural gas market, since natural gas accounted for about 76% of Chesapeake’s first quarter production. The company has been in news of late as it is struggling to fund its capital budget amid diminishing cash flows in a weak natural gas price scenario.

Other Stocks to Consider

While we prefer to remain on the sidelines for Chesapeake, there are other Zacks Ranked #1 (Strong Buy) stocks – Hornbech Offshore Services, Inc. (HOS - Snapshot Report), Newpark Resources Inc. (NR - Snapshot Report) and Gulfmark Offshore, Inc. (GLF - Snapshot Report) – that are expected to perform impressively over the short term.
 

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