Chesapeake Energy (CHK) is one of the most controversial companies, and one of the most hated stocks in the market. It is largely misunderstood, and few recognize the extreme value that may be in the name, largely because of debt concerns. That said, the market has been pricing this stock, and that of peers Southwestern Energy (SWN) and Range Resources (RRC) as if they are approaching bankruptcy. That said, Chesapeake has just demonstrated the power of a short squeeze as shares are rallying today following incredibly strong results, and a positive outlook. In this column, we discuss the metrics that you need to be aware of.

Earnings

For the 2017 fourth quarter, Chesapeake reported net income of $334 million and net income available to common stockholders of $309 million, or $0.33 per diluted share.The company’s EBITDA for the 2017 fourth quarter was $764 million. A adjusted net income attributable to Chesapeake was $314 million, or $0.30 per diluted share, while the company’s adjusted EBITDA was $706 million. That is a pretty strong result and bodes very well for competitors in this sector. Let us discuss this in more detail

Expenses impress

Expenses were down which drove some of this positive benefit. Production expenses during the 2017 fourth quarter were $2.50 per boe, while general and administrative expenses (including stock-based compensation) during the 2017 fourth quarter were $1.34 per boe. Combined production and general and administrative expenses during the 2017 fourth quarter were $3.84 per boe, a decrease of 10 percent year over year and a decrease of 7 percent quarter over quarter. Gathering, processing, and transportation expenses during the 2017 fourth quarter were $7.15 per boe, a decrease of 10 percent year over year and a decrease of 3 percent quarter over quarter.

Production

In addition, production was up as was selling prices, driving a massive run up in earnings. Revenue in the fourth quarter increased 16 percent year over year due to a 3 percent increase in volumes and an increase in commodity prices. Average daily production for the 2017 fourth quarter of approximately 593,200 boe increased by 15 percent over 2016 fourth quarter levels and 10 percent sequentially, adjusted for asset sales, and consisted of approximately 99,900 bbls of oil, 2.603 bcf of natural gas and 59,500 bbls of NGL.

Operational updates

In the Powder River Basin (PRB), strong results from Chesapeake’s latest well placed on production in the Turner formation provides additional confirmation of the PRB’s potential resource. In December 2017, the LEBAR 15-34-69 A TR 22H well was placed on production in the gas condensate window of the Turner with a lateral length of approximately 10,100 feet. This well reached a peak rate of 2,600 boe per day (50% oil) and has cumulatively produced 115,000 boe (50% oil) in its first 60 days of production. The LEBAR well is currently producing approximately 2,000 boe per day (45% oil) with a flowing tubing pressure of 2,600 psi after approximately 80 days on production. Chesapeake’s seventh producing well targeting the Turner formation, the BB 35-35-72 USA A TR 21H, was completed with a 9,677-foot lateral and is scheduled to be placed on production next week. In January 2018, Chesapeake placed three wells on production from the Sussex formation, averaging approximately 6,895 feet in lateral length, and achieving an average peak rate of 880 boe per day (90% oil), while still cleaning up. Chesapeake added a third rig in October 2017 and expects to add a fourth rig in April 2018. Chesapeake expects to place on production up to 33 wells in 2018, compared to 25 wells in 2017.

In the Eagle Ford Shale in south Texas, Chesapeake is currently utilizing five drilling rigs and expects to place on production up to 140 wells in 2018, compared to 166 wells in 2017.

In the Marcellus Shale in northeast Pennsylvania, Chesapeake is currently utilizing one drilling rig and expects to place on production up to 55 wells in 2018, compared to 43 wells in 2017. Chesapeake expects to keep its total gross operated production from the region effectively flat compared to 2017 at approximately 2.1 bcf per day.

In the Haynesville Shale in Louisiana, Chesapeake is currently utilizing three drilling rigs and expects to place on production up to 25 wells in 2018, compared to 36 wells in 2017. In December 2017, Chesapeake placed the Nabors 13&12-10-13 1HC well on production from the Bossier formation, its first ever Bossier horizontal well with a lateral length of more than 10,000 feet, which achieved a peak rate of 35.8 million cubic feet of gas per day.

In the Utica Shale in northeast Ohio, Chesapeake is currently utilizing two drilling rigs and expects to place on production up to 40 wells in 2018, compared to 67 wells in 2017.

In the company’s Mid-Continent operating area in Oklahoma, Chesapeake is currently utilizing one drilling rig and expects to place on production up to 40 wells in 2018, compared to 71 wells in 2017. Chesapeake expects to spud its first horizontal well targeting the Chester formation in Woods County in May 2018 and its first horizontal well targeting the Hunton formation in June 2018. If successful, Chesapeake could drill up to 10 additional Chester and Hunton tests in 2018.

2018 outlook

Over the last four years, Chesapeake Energy has fundamentally transformed its business, removing financial and operational complexity, significantly improving its balance sheet, and addressing numerous legacy issues that have affected past performance. There are still massive debt concerns, as well as cost issues. The biggest positive we could have for the company is natural gas that stayed above $3.00. That would solve a lot of problems. The recent rebound in oil has been a benefit that we expect to continue to see positive results from.Chesapeake Energy continues to get stronger, and we believe we will see in 2018 the results of a reduced cost structure, increased oil production, and key asset sales. We think that this will combine to increase net cash and margins provided by operations. Look for production growth of 2 to 4 percent in 2018, adjusted for asset sales. Further, we foresee improved cash flows.

Bottom line

Shares are at value levels. There is absolutely a lot of risk here still, but we think the potential reward justifies the risk. We are buyers.