Can Chesapeake Energy See Its Stock Move Higher?

With shares of Chesapeake Energy (NYSE:CHK) trading around $34, is CHK an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Chesapeake is involved in the acquisition, exploration, development, and production of natural gas and oil properties in the United States. As the world continues to grow, energy is at the root of this expansion. In order for countries to build infrastructure, machinery requires energy products and services. Look for this company to capitalize on the growth of the world as it provides a product that is essential to development.

Chesapeake Energy filed paperwork for the possible spinoff of its oilfield-services unit. The transaction will be tax-free for its shareholders, the Oklahoma City-based company said today in a statement. Prior to the completion of the spinoff, the unit will convert into a corporation and change its name to Seventy Seven Energy Inc. Chesapeake said last month it was considering the sale or spinoff of the unit, which reported revenue of about $2.2 billion last year and is able to work as a stand-alone firm. Chief Executive Officer Doug Lawler is cutting capital spending by about 20 percent and pursuing further asset sales to close a funding gap of about $1 billion in 2014. “This is probably the direction they’ll go,” Scott Hanold, a Minneapolis-based analyst for RBC Capital Markets who rates Chesapeake at hold, said today in a telephone interview. “The spinoff will satisfy management’s plans to simplify Chesapeake’s corporate structure.” Gordon Pennoyer, a spokesman for Chesapeake, didn’t immediately return a phone call and e-mail seeking comment on whether Chesapeake has decided against a sale.

T = Technicals on the Stock Chart are Mixed

Chesapeake Energy stock has been in a range over the last couple of years. The stock is currently trading sideways and may need time to consolidate before heading higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Chesapeake Energy is trading between its rising key averages which signal neutral price action in the near-term.

CHK

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Chesapeake Energy options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Chesapeake Energy options

30.49%

10%

8%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, as compared to the last thirty and ninety trading days.

Put IV Skew

Call IV Skew

April Options

Average

Average

May Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Chesapeake Energy’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Chesapeake Energy look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

-159.67%

-1229.17%

-48.84%

118.18%

Revenue Growth (Y-O-Y)

28.35%

63.87%

37.95%

41.55%

Earnings Reaction

-4.93%

-6.78%

7.08%

-1.79%

Chesapeake Energy has seen decreasing earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have been pleased with Chesapeake Energy’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Chesapeake Energy stock done relative to its peers, BP (NYSE:BP), ConocoPhillips (NYSE:COP), Anadarko Petroleum (NYSE:APC), and sector?

Chesapeake Energy

BP

ConocoPhillips

Andarko Petroleum

Sector

Year-to-Date Return

-8.95%

-2.06%

-5.15%

3.04%

-2.28%

Chesapeake Energy has been a poor relative performer, year-to-date.

Conclusion

Chesapeake Energy provides access to valuable and essential energy products around the world. The company filed paperwork for the possible spinoff of its oilfield-services unit. The stock has been in a range over the last couple of years and is currently trading sideways. Over the last four quarters, earnings have been decreasing while revenue figures have been rising, however, investors in the company are pleased with recent earnings announcement. Relative to its peers and sector, Chesapeake Energy has been a poor year-to-date performer. WAIT AND SEE what Chesapeake Energy does this quarter.

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