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Chesapeake (CHK) Layoffs Point at Struggles Amid Lower Prices

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Chesapeake Energy Corporation (CHK - Free Report) has announced job cuts after the sale of its oil assets in the Eagle Ford shale play, as part of a planned divestiture.

The company was on the verge of bankruptcy in 2020, following the exponential fall in oil and gas prices. Since then, the company has recovered by focusing on its gas assets in the Marcellus shale in Appalachia and Haynesville shale play in Louisiana, while also reducing its presence in the oil-rich Eagle Ford shale. Chesapeake sold part of its assets in the Eagle Ford shale to Ineos Energy for $1.4 billion and another $700 million worth of assets to SilverBow Resources.

However, CHK has highlighted that the layoffs are completely unrelated to its $7.4 billion merger with Southwestern Energy (SWN - Free Report) . The merger between Chesapeake and Southwestern is expected to create the largest natural gas company in the United States in terms of valuation as well as production. It is set to operate under a new name following the deal’s closure.

Chesapeake and Southwestern have not yet disclosed how the merger will affect their staffing. However, per CHK’s statement, the new company would return to its natural gas roots. In the current scenario, Chesapeake has laid off nearly 10% of its workforce. It has highlighted that the merger will form the first U.S.-based independent natural gas producer, capable of competing at a global level.

Apart from boasting a highly advantageous asset base, the combined entity will also gain access to high-demand markets. This will enable the company to leverage results-driven operational practices and a strong balance sheet with a high level of credit worthiness to drive significant synergies that will benefit both energy consumers and its shareholders.

Chesapeake reported weak first-quarter earnings. This is hardly surprising given the 20% drop in natural gas prices during the quarter. Given the price drop, Chesapeake is following the same course of action as other natural gas producers that are cutting back on production.

Natural gas producers continue to face challenges due to weaker prices that can be attributed to lower-than-expected demand this year. Natural gas prices may continue to be low as it seems highly unlikely that they will reach their post-pandemic highs of 2022.

In the light of these developments and the current market conditions, Chesapeake has decided to defer bringing wells into production and reduce rig and completion activity. The company plans to drop a rig in the Haynesville in March and in the Marcellus around mid-2024. Furthermore, it cut back on a frac crew in each basin in March 2024.

Zacks Rank and Key Picks

Currently, CHK has a Zacks Rank #5 (Strong Sell), while SWN carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the energy sector are Hess Midstream Partners LP (HESM - Free Report) and Eni SpA (E - Free Report) .Hess Midstream and Eni presently sport a Zacks Rank of #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hess Midstream LP owns, operates, develops and acquires a wide range of midstream assets, providing services to Hess Corporation and other third-party customers. The partnership has a stable fee-based revenue model secured via long-term commercial contracts. Since Hess Midstream operates through 100% fee-based contracts, it is exposed to minimal commodity price risks.

Eni is a leading global integrated energy company with a prominent focus on liquefied natural gas businesses. As natural gas has a lesser carbon footprint compared with other fossil fuels, it is likely to play an important role in the global energy transition process. Eni’s participation in the natural gas market should allow it to capitalize on the mounting global demand in the future.

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