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We reaffirmed our Neutral recommendation on Chesapeake Energy Corporation (CHK - Analyst Report) on Sep 20, 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 second 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 an almost 44% year over year increase in oil production during the second quarter.

As the company shifts its focus to more liquid-rich plays, it expects natural gas production to fall approximately 7% in 2013, while liquids production is expected to increase approximately 27%.

Chesapeake expects 2013 total production in the band of 1,434–1,478 Bcfe. Natural gas is expected to contribute 1,080–1,100 Bcf to the total production. Oil production forecast is 38–40 million barrels/MMBbls, and NGL will likely be in the 21–23 MMBbls range.

During 2013, Chesapeake aims to spend approximately 86% of its total drilling and completion capex on liquids-rich plays. The company also plans to invest heavily in the development of its holdings in the Eagle Ford Shale, Granite Wash and Mississippi Lime.

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 expenditures that resulted from volatile natural gas prices.

However, Chesapeake’s results are particularly vulnerable to fluctuations in the natural gas market, since natural gas accounted for about three-fourth of Chesapeake’s first half 2013 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 such as Pembina Pipeline Corporation (PBA - Snapshot Report), Stone Energy Corp. (SGY - Analyst Report), and China Petroleum & Chemical Corp. (SNP - Analyst Report) that are expected to perform impressively over the short term.
 

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