Is Chesapeake Energy’s Stock a Buy Now?

With shares of Chesapeake Energy Corporation (NYSE:CHK) trading at around $20.70, 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:

C = Catalyst for the Stock’s Movement

For a long period of time, Founder and CEO Aubrey McClendon was a superstar. However, he’s now about as reveled as Barry Bonds. Mr. McClendon founded Chesapeake Energy in 1989 and built something that at the time would have been deemed impossible. Now, he’s a man stepping down from his own company – effective in April – with his head held low.

That said, it’s okay to leave with your head down if it could possibly mean avoiding trouble with the law.

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McClendon has been accused of antitrust violations and overstepping boundaries that led to personal gains. In regards to the latter, he supposedly arranged to personally borrow more than $1 billion from EIG Global Energy Partners, which is a big investor in Chesapeake. As the story goes, McClendon would receive the loans through shell companies in which he had a 2.5 percent stake. These 2.5 percent stakes were allowed because of a controversial Founders Well Participation Program. Because of this program, Mr. McClendon would be offered a 2.5 percent stake in every well drilled by Chesapeake. All that said, up until this point, the board’s probe has led to no findings of improper conduct.

As an investor, the key here isn’t whether or not Mr. McClendon is innocent or guilty, but that he is stepping down. This drama has taken away time and focus. With Mr. McClendon out of the picture, Chesapeake will have an opportunity to focus on business again.

It’s worth noting that there were several large insider purchases over the past six months. It’s possible that some people knew what was ahead. This once again proves the power of large insider buying when it comes to prophecy. The accuracy rate isn’t perfect, but it’s still extraordinary.

An embattled and unpopular CEO stepping down doesn’t necessarily mean great fortune in the future. Let’s take a look at the big picture for Chesapeake prior to forming an opinion. ..

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio is normal on a grand scale, but it’s high for the industry. Chesapeake has a higher debt-to-equity ratio than Devon Energy Corporation (NYSE:DVN) and EOG Resources (NYSE:EOG). Chesapeake’s balance sheet is in poor condition.

Debt-To-Equity

Cash

Long-Term Debt

CHK

0.92

$298.00 Million

$16.22 Billion

DVN

0.52

$7.50 Billion

$11.24 Billion

EOG

0.46

$1.11 Billion

$6.31 Billion

 

T = Technicals on the Stock Chart Still Qualify As Strong

The past three years haven’t been kind to Chesapeake. The performance has been especially poor considering the strong bull run throughout the broader market. However, the stock has performed better as of late.

1 Month

Year-To-Date

1 Year

3 Year

CHK

15.09%

14.68%

-12.39%

20.04%

DVN

11.32%

9.42%

11.23%

-12.13%

EOG

7.19%

5.26%

22.73%

43.14%

 

At $20.97, Chesapeake Energy is currently trading above all its averages.  

50-Day SMA

17.28

100-Day SMA

18.39

200-Day SMA

18.18

 

E = Earnings Have Been Inconsistent   

Earnings have been on somewhat of a roller coaster ride since 2007. This would be more like a classic roller coaster with fewer peaks and valleys than today’s extreme roller coasters, but it’s still far from a steady ascent. Revenue has been improving since 2009.

2007

2008

2009

2010

2011

Revenue ($)in billions

7.80

11.63

7.70

9.37

11.64

Diluted EPS ($)

2.63

0.93

-9.57

2.51

2.32

 

When we look at the last quarter on a year-over-year basis, we see significant declines in earnings and revenue.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

3.98

2.73

2.42

3.39

2.97

Diluted EPS ($)

1.23

0.73

-0.11

1.29

-3.19

 

T = Trends Do Not Support the Industry

Chesapeake has been at the epicenter of drama recently. This is on top of the fact that natural gas has been performing poorly – despite the constant hype that natural gas receives in regards to potential. This hype is likely to continue for a considerable period of time.

Conclusion

On the positive side, a damaged CEO is stepping down, annual revenue growth is present, and cash flow is good. On the negative side, margins are weak, the balance sheet is poor, the stock has underperformed the market for years, and trends do not support the industry. In most cases such as these, the stock would be a STAY AWAY. However, annual revenue growth combined with a new CEO could make for a prettier picture. Therefore, Chesapeake is currently rated a neutral WAIT AND SEE. There are still too many question marks for a higher rating.

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