By Sarfaraz A. Khan
NEW YORK (TheStreet) -- Chesapeake Energy (CHK) , the second-largest natural-gas and 10th-largest oil producer in the United States, which was on the brink of bankruptcy just two years ago, has found a way to fix its high levels of debt and also possibly take advantage of weak oil prices to make a major acquisition.
The Oklahoma City-based company became one of the biggest players in the U.S. natural-gas sector on the back of the shale gas boom, but its growth was driven largely by debt.
In an Oct. 21 research report, UBS analyst William Featherston wrote that by one measure, net debt-to-capitalization, Chesapeake was about three times more leveraged than the average of some of the leading oil and gas producers between 2010 and 2012.
However, he has forecast that Chesapeake will significantly improve its financial health so that its net debt-to-capitalization will be just 1.8 times greater than the average of its peers by the end of the year.
Further, the credit-rating agencies Moody's and Standard & Poor's recently improved Chesapeake's rating outlook to "positive" as the energy giant inches closer toward achieving investment-grade ratings for the first time.
This optimism has been fueled by the $5.4 billion sale of shale oil and gas properties in Pennsylvania and West Virginia to Southwestern Energy (SWN) less than two weeks ago.
The sale, the proceeds of which were considerably higher than the market's consensus estimate of $2.5 billion, will allow Chesapeake to further cut down its debt of $15 billion and focus on production from high-return oil-rich assets, Featherston wrote.
In an email, Chesapeake spokesman Gordon Pennoyer referred to recent comments by Chief Executive Doug Lawler in which he called the asset sale a "major step" in the company's transformation that would lead toward "dramatic improvement" in its financial health.
Buoyed by the asset sale, Featherston estimates that the company's liquidity for next year stands at $11.5 billion, and this isn't threatened by weakness in oil prices.
The futures for Brent and WTI crude oil have fallen by more than 20% over the past three months to between the low-and-mid $80s, which caused a 28% drop in exploration and production stocks, as represented by the SPDR S&P E&P ETF (XOP) .
And according to a recent Goldman Sachs report, things could get worse with WTI averaging about $74 a barrel next year.
However, Featherston has said that even if WTI prices were to hover at about $75 a barrel next year, Chesapeake would still represent "one of the most attractive liquidity positions" as compared with other oil and gas producers covered by the bank.
In the meantime, Chesapeake could take advantage of the "attractive valuations" offered by the energy companies, thanks to the plummeting stocks by buying an oil and gas producer, Featherston wrote.
The analyst has said that Bonanza Creek Energy (BCEI) Carrizo Oil & Gas (CRZO) , Energen Corp. (EGN) , Laredo Petroleum (LPI) and Oasis Petroleum (OAS) are potential takeover targets that could allow Chesapeake to expand its oil reserves and improve the below-average levels of oil in its total inventory.
When asked whether Chesapeake will use the proceeds from the asset sale to make an acquisition, Pennoyer quoted Lawler's comment that the oil and gas producer would use the cash "in ways that will continue to drive even greater shareholder value."
Chesapeake's shares, which are trading at about $21 apiece, have dropped by 23% this year.
UBS has a "buy" rating on the stock with a price target of $27.