We maintain our Neutral recommendation for Chesapeake Energy Corporation (CHK) following strong third quarter results and several potential shale play transactions.
After a whopping 22% increase in average daily production volumes in the third quarter, Chesapeake is guiding toward production growth of 13% for full-year 2010, and 18% for both 2011 and 2012.
Chesapeakehas been involved in several shale play deals in the past few months to raise funds for development activities. Early this year, it had entered into a $2.25 billion joint venture with Total SA and recently sold one third of its Eagle Ford acreage for $2.16 billion to CNOOC Limited (CEO).
We believe these initiatives position the company to deliver industry-leading finding and development costs and returns on capital. At the same time, Chesapeakeis also accumulating position by acquiring acreages. It recently acquired an additional 500K acres in the Marcellus Shale from the privately held Anschutz Corporation for $850 million and 23.2K acres in Eagle Ford Shale from Australia’s Antares Energy Ltd. for $200 million.
Though the company’s production and reserves are still natural gas weighted, its increasing focus on liquids is appreciable. Approximately 60% of this year’s growth is expected to come from increased liquids production. For 2011 and 2012, liquids production is expected to be 80% and 60%, respectively.
Despite the strong growth projections, Chesapeake’s further acreage accumulation is a cause of our concern and it remains to be seen how the company aligns its newly acquired assets with the existing holdings. Moreover, we believe improvement in its underlying valuation via liquid initiatives is a time taking matter. Our Neutral recommendation for the stock remains unchanged with the Zacks #3 Rank (Hold).
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