Chesapeake Energy (CHK, Financial) ended fiscal 2014 with good growth despite the weaker oil price environment. After an impressive financial performance in 2014, Chesapeake has emerged as stronger, less complex and more flexible company. In addition, the company also saw great improvement in the production with reduced rig count. The management is optimistic about better performance in the future.
However, the oil market prospects are not favourable. Still, the company is expecting significant improvement in cash flow and earnings in 2015 due to several strategic initiatives and lower gas prices. Besides this, Chesapeake will also be focusing on maintaining a competitive cost structure which can help it to stay competitive in these market conditions.
The way ahead
A strong quarterly performance is clear evidence of Chesapeake’s operational excellence. The stock has been impressive on the stock market in the past as well. This has helped Chesapeake to improve its capital efficiency by 30% to 60% in each of its operating areas. With this growth in the efficiencies, the company is expecting to achieve cost leadership in the coming days. In addition, the company wants better cost reductions to improve margins and it seems that its efforts are taking shape as in it reduced its capital expenditure by 23% as compared to 2013. It is expecting further cost reduction to deliver significant synergies to it in future.
Moving ahead, a close focus on core assets should also ramp up Chesapeake’s growth in 2015. The company is letting off its non-core assets while having a close focus on some of its booming core assets. Under this, Chesapeake is putting all its efforts to uplift its E&P business. The company has also sold its Southern Marcellus shale and Eastern Utica shale assets which contributed to achieve better financial flexibility. This financial flexibility should impact its balance sheet predominantly, attracting more investors to the stock.
For 2015, Chesapeake will be focusing majorly on achieving better financial and operational flexibility. Since, the overall commodity market is challenging, driving the costs lower will be among Chesapeake’s prime priorities. This will generate cash which it can invest in some of the most profitable ventures for better returns. To achieve this, the company has also reduced its capital program by 37% and is expecting the production to grow between 3% and 5% in 2015. In addition, the lower gas prices are also an advantage for Chesapeake as it can further support its business growth.
Conclusion
Moving to the fundamentals, the stock with a trailing P/E of 7.39 is dirt cheap and with forward P/E of 30.69 the stock is showing positive earnings growth in the near term. It is expected to gain good market share in future with an attractive profit margin of 9.15%. Considering all these facts, it can be seen that Chesapeake Energy is definitely a good pick as of now.
