A natural gas drilling rig at a Chesapeake Energy site in Pennsylvania.
Daniel Acker/Bloomberg
Chesapeake Energy, the Oklahoma oil and gas producer that emerged from bankruptcy in February, was Exhibit A for some of the excesses of the last decade, when “drill, baby, drill” corporate strategies led to terrible investor returns.
Now, analysts are holding it up as a model of the so-called Shale 3.0 era — the movement to finance drilling with cash flow rather than with debt, and return excess cash to shareholders.
On Thursday, John Gerdes of MKM Partners initiated coverage on the new and improved Chesapeake (ticker: CHK) with a Buy rating and a $61 price target on the stock. Shares were up 0.4% on Thursday, to $53.
He thinks that as long as oil and gas prices hold up, the company can produce $3.4 billion in free cash flow from 2021 to 2025, or about 60% of its current market cap. Chesapeake is already known for its natural gas production, and plans to transition even more of its business toward gas in the next year. Liquids — including oil and natural gas liquids — will be about 15% of its production, Gerdes notes. He likes the move because gas production is less capital-intensive than oil production.
Other analysts have questioned that decision, given the high price of oil right now and the general preference for oil production over gas among many energy companies.
Wolfe Research analyst Josh Silverstein, for instance, asked on the company’s latest earnings call, “Why not increase the oil activity?” U.S. oil prices are up 36% this year, while natural gas prices have risen 18%.
Chesapeake CEO Michael Wichterich said that the company’s rate of return on its gas projects were strong and that it needed to see better rates on oil projects before it would shift. “This is not an oil or gas conversation for us. It’s a rate of return,” he said.
After emerging from its restructuring, Chesapeake moved quickly to return cash to shareholders, announcing a new dividend this month that gives the stock a 2.6% yield. The company now has $1.3 billion in long-term debt, down from $9.2 billion in the first quarter of 2020.
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