Chesapeake Energy CHK Message Board

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Gold/Mining/Energy : Chesapeake Energy CHK

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From: Dennis Roth	9/5/2007 8:17:10 AM
	of 726

Reduced drilling positive; asset sales should reduce overhang Goldman Sachs September 05, 2007 What's changed Chesapeake announced it is temporarily reducing drilling activity due to low natural gas prices and separately plans to sell assets to avert the need to issue equity. Despite curtailments and asset sales, Chesapeake maintained production guidance for 2007 and 2008 and initiated double-digit growth guidance for 2009 with flat spending versus 2008. Implications We believe these announcements are a positive for both the sector and Chesapeake. We had previously thought Chesapeake’s 2007 and especially 2008 guidance was conservative, and we are now using estimates closer to guidance (though lower than company guidance for 2009). Management’s asset sale intentions should help reduce the overhang in Chesapeake shares regarding expected future equity offerings, though it may take actual announcements for full recognition. Reduced debt from asset sales is more positive for 2009 and 2010 estimates, which we are raising. Valuation Chesapeake shares (Neutral rated) trade at 4.6x 2008 EV/debt-adjusted cash flow, below XTO Energy, EnCana and Anadarko Petroleum and at a similar level to EOG Resources, Apache and Devon. We see 20% upside to a $39 12-month discounted cash flow based price target. Key risks Commodity price volatility, drilling results, cost pressures and government pronouncements are key risks. Impact on related securities We have expected companies to announce production shut ins earlier this year versus last year and believe these announcements support our view that a bottom in natural gas prices and E&P stocks is near due to our positive outlook for 2008 and 2009 natural gas prices.

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