Chesapeake Continues to Cut the Fat: How Lean Is Too Lean?

Chesapeake Energy

Chesapeake Energy Corp. (NYSE:CHK) CEO Doug Lawler, hired less than a year ago to replace founder Aubrey McClendon, is betting that patience and discipline will work where his predecessor’s aggressive expansionary strategy fell short.

Although McClendon was responsible for much of the innovation and growth at Chesapeake — under his guidance, the company became the second-largest producer of natural gas in the U.S.–  he was also mired in a damaging financial scandal, and when he left in April, many investors seem glad to wipe their hands of the complication. Lawler became boss effective June 17, and he has spent a lot of time over the past several months aggressively cutting costs and trimming operational fat. Chesapeake sold nearly $4 billion in assets in 2013 as it sought to streamline operations that became outsized under McClendon, and the company has reduced its workforce by nearly 10 percent.

Investors have generally been happy to go along for the ride. Shares are up about 39 percent over the past 52-week period, but the rally tripped over questionable results in November, and the stock pretty much flatlined after that. The stock has been sensitive to news, experiencing several steep dives followed by dramatic recoveries, dips that last for just a few days.

Most recently, this happened at the beginning of February, when Chesapeake reported 2014 production growth projections that didn’t impress analysts. The company projected unadjusted production growth in a range between 2 and 4 percent. Adjusted for a 20 percent reduction in capital expenditures — spending targeted in a range between $5.2 billion and $5.6 billion — production growth is projected at between 8 and 10 percent for the year.

Shares fell nearly 8 percent after the production outlook was released. The outlook was a sober reminder that Chesapeake is a company in the midst of restructuring and with more problems to solve yet. And while asset sales are projected to decelerate, the company is losing a lot of weight quickly. Whether a leaner Chesapeake will be able to compete in the U.S. energy market over the long term is an unresolved question.

In an effort to make sure the answer is “yes,” Chesapeake has been actively sweeping all the operational skeletons out of its closet, looking to optimize a business that McClendon left  a little obese. One of those skeletons was Chesapeake Oilfield Services (COS), a fully owned subsidiary that operates in its namesake business. Chesapeake said Monday that it would be pursing “strategic alternatives” for the division, including a “potential spin-off to Chesapeake shareholders or an outright sale.” The division had 2013 revenues of approximately $2.2 billion.

The market appeared to take the news well and drove shares up a percentage or two in early trading on Monday before the stock settled. Investors want to see the company lose some weight, and spinning off the oilfield services unit allows for that without jeopardizing production.

“A separation of COS is aligned with our strategies of financial discipline and profitable and efficient growth from captured resources,” Lawler said in the release.