Chesapeake also is working to pay down long-term debt. The company cut its debt by about $2.2 billion in 2011 and has said it is on pace to eliminate another $800 million in 2012. Chesapeake finished 2011 with debt of about $10.3 billion.
Analyst Jeb Armstrong said he is not worried about Chesapeake's finances because the company has little long-term debt due until 2015 and that it can change its spending plans if it has to.
“The thing that Chesapeake and many other companies have at their advantage is the ability to control their capital budget,” said Armstrong, an analyst with Credit Agricole in New York. “There is a degree of cushion that they have should the expected cash flow not meet what they're looking for. I would agree that spending is on a track that would require higher prices and more asset sales along the way, but I think they have the flexibility to be able to adapt should the numbers seem to be out of reach.”
Others, however, say Chesapeake may not be so flexible.
“If I thought this was a financially sound company, my rating probably wouldn't be what it is,” said Weiss, who has a “sell” rating on the stock and has called for the company to replace McClendon and the entire board of directors.
“To meet the obligations under the VPPs, they have to spend to produce the hydrocarbons,” Weiss said. “They have obligations to drill under the joint ventures, so they can't just eliminate spending.”
Other analysts have more of a mixed view.
“Does the company have a liquidity issue that results into going bankruptcy? I don't foresee that at this point, but they definitely have a lot of work ahead of them,” said Scott Hanold, with RBC Capital Markets in Austin. “That creates a lot of risk.”
Some of Chesapeake's success is dependent on commodity prices.
“If the price of oil stays high, Chesapeake gets through this nicely and comes out on the other end looking like a revived company,” Global Hunter's Kelly said. “Shareholders are going to stand to prosper greatly if they stick it through. If you have a longer-term outlook, it represents an extremely good buying opportunity.”
But not all analysts are as optimistic.
“We just don't know what will happen with oil and natural gas prices,” Weiss said. “It's just not the prudent way to run this kind of business. The well-run successful companies are not doing business like that.”
Weiss is responsible for putting together his company's forecasts for energy prices.
“Whatever number I say is probably the one number it won't be,” he said. “There are just too many variables. It's not just the supply and demand. It's the domestic economy. It's the global economy. It's the fact that most of the world's liquid resources are controlled by sovereign nations, not companies, so supply and demand often doesn't matter with those countries.”