Chesapeake’s turnaround also depends on its ability to generate more liquid production. Natural gas accounted for 90% of the company’s revenues in 2009 but that figure declined to 78% last year. Curtailing drilling activities in areas like the Marcellus should translate into higher profitability and better returns on investment.
(4) Cost cutting and efficiency gains
Chesapeake has been making progress on its cost cutting initiatives. In December, the company eliminated 275 head office employees as part of its turnaround program. These efforts are starting to show up in Chesapeake’s financial results with administration costs falling 26% year-over-year to $1.11/mcf last quarter. Investors will want to see continued improvements on this front.
Investors should also be watching the company’s operational metrics closely. During the last conference call management discussed several new initiatives to improve performance. Specifically, the company is talking highly of its new pad drilling program to reduce cycle times. Look to see if that talk shows up in the results.
Catalysts
(5) Higher natural gas prices
As always in any conference call, you should expect to hear bullish prognostications about the future of natural gas and its unlimited potential. I don’t take management’s self-interested view too seriously on this issue. However, there are reasons to be cautiously optimistic about the prospects of natural gas.
First, according to the EIA, natural gas production is projected to only grow 1% in 2013. That’s a big drop from 8% and 4% production growth we saw in 2011 and 2012 respectively.
Second, natural gas demand is building. Low prices are starting to encourage power plants to switch over from more expensive coal. We’ve also seen companies begin to convert heavy vehicles and locomotives to natural gas in order to take advantage of low prices.
As the second largest producer of natural gas in the country, higher prices would go a long way to speeding up the turnaround at Chesapeake.
Foolish bottom line
Chesapeake Energy Corporation (NYSE:CHK) is moving from a basket case to a viable turnaround. It’s clear the company is starting to use asset sales and higher margin production to regain its former standing in the industry. If this momentum can continue, the stock has a lot of upside potential.
The article 5 Thing to Look for From Chesapeake This Earnings Season originally appeared on Fool.com and is written by Robert Baillieul.
Robert Baillieul has no position in any stocks mentioned. The Motley Fool has the following options: long January 2014 $30 calls on Chesapeake Energy. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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