Everyone loves a good turnaround play. One of the more interesting in the energy sector has been natural gas fracker Chesapeake Energy (CHK).

If you remember, the CHK story involves a myriad of issues — everything from high debt and cratering natural gas prices to back room hedge funds and private favors.

Those issues have resulted in a garage sale of assets, a fired founder CEO, poor earnings and questions about whether or not the firm is still a viable business.

With its latest earnings report, CHK has managed to put some of those issues to rest.

The key word in that sentence is some. Just as Chesapeake is riding high, a potentially serious problem has raised its ugly head. For investors in CHK stock, the turnaround may not continue to stall.

Great Earnings for CHK, But…

Many of Chesapeake’s problems stem from just how CEO Aubrey McClendon ran the natural gas superstar. Secret hedge funds, a controversial Founder Well Participation Program and personal loans backed by the program were just some of internal financial issues facing the driller under McClendon’s watch.

Those revelations about the firm’s finances and inner dealings of McClendon sparked massive stock losses, civil and federal probes and a hefty dose of shareholder activism. Add in a hefty CAPEX spending program enacted just before natural gas prices crashed in 2013 and it’s easy to see how CHK stock fell from its glory day peaks.

Since McClendon’s ouster last year, Chesapeake has undergone asset sales galore and has reduced its exposure to dry gas and increased its production of wet gas, NGLs as well as crude oil. Those efforts have finally begun to bear fruit-, with CHK seeing some pretty big profits in it latest earnings report.

For the latest quarter, CHK reported earnings of $662 million or 26 cents per share. Adjusted for one-time items, Chesapeake reported a 38 cents per share profit. Both of those numbers managed to trounce analyst’s estimates, as did CHK’s reported revenues. The energy stock posted revenues of $2.34 billion for the third quarter, demolishing analysts expectations of just $1.74 billion.

The reason for the beat came from two of its most prolific operating regions — Pennsylvania’s Marcellus Shale and Texas’ Eagle Ford.

In both regions, CHK managed to see falling drilling costs as well as rising production. Versus 2013’s numbers, Chesapeake saw its costs to drill and complete a well dropped 11% in the Marcellus and 13% in the Eagle Ford. These two prolific shale regions made up the vast bulk (34%) of Chesapeake’s third-quarter production.

What’s more, CHK has seen rising production in both regions and now expects to produce a whopping of 700,000 barrels of crude oil equivalent (BoE) a day this year. That’s about 5,000 per day higher than estimates made at the end of August.

Higher analyst beating profits, rising production, lower costs- What’s not to like? So it’s no wonder why CHK stock shares surged around 7% after they reported earnings.

But there’s a catch. CHK isn’t out of the woods just yet.

The Problem

First, the firm is very much a dry natural gas producer — with 71% of its output coming from the fuel. While that’s not necessarily a bad thing and CHK is changing that, prices for the fuel have been soft. And with some analysts predicting a mild winter, prices could drop further, which would crimp any excitement from the latest earnings report.

Secondly, Chesapeake’s balance sheet is still in pretty bad shape — the company currently has about $12 billion in long-term debt. Asset sales have helped, but the firm is still moving ahead with more sales. The latest was a $5.4 billion deal to sell gas fields to Southwestern Energy (SWN). This sale was the largest asset divestment in CHK’s nearly 25-year history.

These fields in the Marcellus and Utica are prime assets and their production losses could hurt CHK in the longer run. It also shows that CHK is running out of “junk” to sell.

Finally, there’s this little thing about a U.S. Department of Justice investigation.

Just after reporting crazy-good earnings, CHK announced that it has received multiple subpoenas from states and the DoJ seeking information on its royalty payment practices to land owners and various antitrust issues. According to the filing, Chesapeake could face a plethora of lawsuits from landowners and state governments over the underpayment of royalties as it has improperly used deductions and below-market pricing in its favor.

The seriousness of the news sent CHK shares down nearly 4%.

CHK Still Turning Around

For investors, the story at CHK is one of give and take. Two steps forward, one step back.

The surprise profit beat, along with rising oil production is ultimately a huge win for Chesapeake and CHK stock investors. That’s the kind of wins it needs to really move past the ghost of former CEO Aubrey McClendon and its chronic underperformance.

But you shouldn’t think that CHK is a slam dunk.

The issues facing the firm are big. The government continues to throw the gauntlet at BP (BP) for its involvement in the Deepwater Horizon spill. While CHK didn’t mess with the environment and this issue is nowhere as big, it did potentially “screw” with Mom & Pop landowners.

Who knows what the penalties could be if it’s found guilty? Any additional cash payouts plus higher royalties in the future will go a long way in crimping its cash flows, dividend and its debt reduction plans. The market does seem spooked by it.

The Bottom Line: CHK’s turnaround is still turning. The latest positive earnings report is step in the right direction. But as a turnaround, investors should still use caution. Especially if the DoJ is snooping around.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.