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Chesapeake Strikes Cash

Chesapeake Energy (CHK), our long-term pick in the natural gas sector, continues to make significant progress in its quest to stabilize its once debt-bloated balance sheet.

The company, which became infamous for making all the wrong moves, is finally taking steps to raise cash and secure its future growth potential.

To be sure, it may be selling the right assets at the wrong time, as Chesapeake has little choice if it wants to avoid a credit downgrade. Fortunately, it has the assets to sell and, afterwards, will still be left with some of the most valuable land in the United States when it comes to energy resources.

Indeed, last week, CHK announced that it raised another billion dollars from an asset sale.

Exco Resources Inc. (XCO) agreed to acquire producing and undeveloped oil and gas assets in the Eagle Ford and Haynesville shale formations for a total of $1 billion. This sale allows CHK to fully fund its 2013 capital expenditure budget.

Exco bought 55,000 acres of developed and undeveloped land, including 120 wells producing around 6,100 barrels of oil per day and 114 million cubic feet of gas per day.

This sale is significant, as it raises cash for CHK. However, it also shows the potential of Chesapeake’s remaining holdings, which still contain huge amounts of natural gas and liquids production of more than 40,000 barrels per day.

In 2012, the company sold almost $12-billion worth of assets, and this year it’ll sell close to $7 billion more.

This will result in a major boon for the company’s bottom line going forward, shaving hundreds of millions of dollars off the company’s debt service obligations. That means increased profits and a rerating of shares.

Last year, when CHK was making its initial moves, natural gas was trading close to $2 per thousand cubic feet (mcf). Today, that price is almost double. Oil was trading in the $75 to $85 range a year ago. Today, we’re over $100 and will likely average more than $90 per barrel this year.

Based on those numbers and the reduction in debt service, CHK could see its earnings per share skyrocket in 2013 and 2014.

In 2012, the company earned less than $0.75 per share with an income statement marred with charge-offs. In 2013, analysts are expecting the company to earn around $1.50 per share. We think that number will be much higher – closer to $1.90 per share based on the effects of lower debt service, higher natural gas prices and higher prices from the sale of liquids.

Based on the higher estimate, we could see shares trade close to $30 per share by this time next year, up almost 50% from current levels.

Of course, these assumptions are based on natural gas staying above $3.50 and oil in the $90s. But that shouldn’t be a problem. With the U.S. economy continuing to grow, and continued unrest in many parts of the globe, the price of energy should remain at current levels, if not higher.

Furthermore, the recent selloff in the market has knocked CHK down a bit, and that’s providing an attractive entry point for the shares. Company insiders know this, which is why they’ve spent millions in recent months picking up the stock.

So if you’re looking for exposure to a company that’s growing its earnings faster than most small-cap energy companies, is asset rich and has a new management team focused on performance, then Chesapeake Energy is your best bet in the sector!

And “the chase” continues,

Karim Rahemtulla