Chesapeake's $2B Asset Sale Dissolves BofA's Bearish Thesis

Chesapeake Energy Corp. CHK announced the sale of its Ohio oil and gas holdings on Thursday. 

The Analysts

Bank of America Merrill Lynch analyst Doug Leggate upgraded Chesapeake from Underperform to Neutral with a price target lifted from $4 to $6. 

The Thesis

Chesapeake’s announcement of the $2-billion sale of its Utica assets drove BofA's upgrade, Leggate said in the Friday upgrade note. (See the analyst's track record here.)

The transaction "is a significant turning point that delivers promised reduction in debt and allows the market to refocus on its underlying assets," the analyst said. 

Chesapeake should generate free cash flow in 2019 for the first time in several years due, Leggate said.

The Powder River basin is becoming the company's oil growth driver, he said; Chesapeake recently disclosed well production plans in the basin that are ahead of schedule and demonstrate a positive outlook for overall production in 2019.

"In summary, we believe the worst has passed for Chesapeake. CHK will still have poor balance sheet metrics for the time being that will keep the shares amongst the more volatile of the large cap U.S. oils," the analyst said. 

Chesapeake remains a "gas-levered" stock, with 73 percent of post-sale production being in natural gas, according to BofA. 

Price Action

Chesapeake shares were rallying 12.16 percent to $4.94 off the open Friday. 

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