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Chesapeake Energy Corporation (CHK): This Issue Is On The Horizon

Chesapeake Energy Corporation (NYSE:CHK)‘s performance over the past two quarters hints at a company that’s really turning things around, with a renewed emphasis on financial discipline and shareholder returns over reckless, debt-fueled expansion.

Chesapeake Energy Corporation (NYSE:CHK)With former CEO Aubrey McClendon gone and Chief Operating Officer Steve Dixon having stepped in as acting CEO, the company has a new strategy in place: Instead of acquiring new assets, it will focus on developing existing ones – its so-called “core of the core” assets.

So far, the new approach appears to be paying off. First-quarter net income swung to a $58 million profit, as compared to a $28 million loss in the same quarter a year ago. And oil production grew 56% year over year, while production and administrative costs fell by 18% and 29%, respectively, from the year-earlier quarter.

“We’re beginning to see the benefits of our operational strategy shift from identifying and capturing new assets to developing our extensive existing assets as we enter a new era of shareholder value realization,” Dixon said during the company’s quarterly earnings conference call.

Chesapeake’s biggest challenge
While all that is well and good, Chesapeake Energy Corporation (NYSE:CHK) still faces major hurdles related to its high level of long-term debt, which came in at a worrisome $13.4 billion in the first quarter. To bring its debt down to a more manageable level – around $9.5 billion – this year, the company will continue to shed assets.

But therein lies a huge problem: How will Chesapeake Energy Corporation (NYSE:CHK) reconcile the conflicting challenges of maintaining robust production growth, while at the same time continuing its asset sale strategy?

Despite closing some $12 billion worth of asset sales last year, Chesapeake Energy Corporation (NYSE:CHK) still faces a daunting $3.5 billion funding gap – the difference between its spending and expected cash flow – for the year. To plug this gap, the company hopes to raise between $4 billion and $7 billion from asset sale proceeds.

So far this year, it has already signed or closed on $2 billion of asset sales. If it can sell $2 billion more and meet its low-end target of $4 billion in asset sales, the company reckons that it should be able to fully fund its spending program for the year, while maintaining long-term debt at or below its year-end 2012 level.