Does Chesapeake Energy Have a Bright Future?

With shares of Chesapeake Energy (NYSE:CHK) trading around $27, 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, the U.S. natural gas explorer that was on the verge of running out of cash two years ago, said output will grow by the slimmest margin in 14 years as the company sheds its weakest-performing assets. Chesapeake cut its output growth estimate for this year to 2.2 percent in a statement today, compared with a 4.3 percent target announced earlier this month. The fall-off stemmed from wells the Oklahoma City-based company is selling from Pennsylvania to Wyoming as part of $4 billion in divestitures by Chief Executive Officer Doug Lawler.

T = Technicals on the Stock Chart are Mixed

Chesapeake Energy stock has been moving higher in recent times. However, the stock is currently pulling back and may need time to stabilize. 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 above its rising key averages which signal neutral to bullish 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

29.67%

6%

4%

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 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Flat

Average

July Options

Flat

Average

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

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

2,600.00%

-159.67%

-1229.17%

-48.84%

Revenue Growth (Y-O-Y)

47.37%

28.35%

63.87%

37.95%

Earnings Reaction

4.44%

-4.93%

-6.78%

7.08%

Chesapeake Energy has seen rising earnings and 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), Conoco Phillips (NYSE:COP), Andarko Petroleum (NYSE:APC), and sector?

Chesapeake Energy

BP

Conoco Phillips

Andarko Petroleum

Sector

Year-to-Date Return

1.58%

5.37%

9.99%

25.33%

9.56%

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 cut its output growth estimate for this year to 2.2 percent in a statement today, compared with a 4.3 percent target announced earlier this month. The stock has been moving higher in recent times, but is currently pulling back. Over the last four quarters, earnings and revenue figures have been rising. However, investors have had mixed feelings about recent earnings announcements. 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.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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