Is Chesapeake Headed in the Right Direction?

With shares of Chesapeake Energy Corporation (NYSE:CHK) trading at around $19.25, 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

Chesapeake is the second-largest natural gas producer in the United States. If natural gas prices continue to increase, then Chesapeake will benefit in a big way. More than 65 percent of Chesapeake’s production mix is natural gas.

Currently, Chesapeake has two focuses, which are increased production at Eagle Ford and the reducing debt. New CEO Steve Dixon is highly confident that Chesapeake won’t outspend its planned drilling budget of $6 billion. Below is a quick overview of some positives and negatives for Chesapeake.

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Positives:

  • Several large insider purchases over the past six months
  • 1.80 percent yield (higher than peers)
  • Carl Icahn has placed a large bet
  • Improved oil production
  • Reducing long-term debt through divestments
  • Knows how to cut out middleman
  • Increased rig transfer speed

Negatives:

  • Majority of analysts recommend Hold
  • Revenue decline in 2012
  • Weak margins
  • Subpar cash flow
  • Increased expenses
  • Awful stock performance in 2008 (lack of resiliency)
  • Weak performance in bull market since 2009
  • Debt is a concern (but a plan is in place)

Now let’s take a look at some comparative numbers. The chart below compares fundamentals for Chesapeake, Anadarko Petroleum (NYSE:APC), and SandRidge Energy (NYSE:SD). Chesapeake has a market cap of $12.42 billion, Anadarko has a market cap of $41.97 billion, and SandRidge has a market cap of $2.37 billion.

CHK

APC

SD

Trailing   P/E

N/A

17.69

26.26

Forward   P/E

10.41

16.37

N/A

Profit   Margin

-6.24%

17.97%

5.18%

ROE

-3.31%

11.97%

7.69%

Operating   Cash Flow

 $2.84 Billion

$8.34 Billion

 $783.16 Million

Dividend   Yield

1.80%

0.40%

N/A

Short   Position

N/A

1.50%

16.90%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Normal          

The debt-to-equity ratio for Chesapeake is weaker than the industry average, but it still qualifies as normal. Chesapeake is working hard to reduce long-term debt.

Debt-To-Equity

Cash

Long-Term Debt

CHK

0.72

$291.00 Million

$12.85 Billion

APC

0.66

$2.47 Billion

$14.46 Billion

SD

1.11

$309.77 Million

$4.30 Billion

 

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T = Technicals Are Mixed

Chesapeake has been all over the map when it comes to stock performance, but the bottom line is that without a CEO change, there wouldn’t be much to brag about.

1 Month

Year-To-Date

1 Year

3 Year

CHK

-5.83%

16.94%

10.68%

-14.85%

APC

-5.54%

12.95%

14.18%

21.50%

SD

-7.08%

-21.42%

-33.82%

-33.91%

 

At $19.25, Chesapeake is trading below its 50-day SMA, but above its 100-day SMA and 200-day SMA.

50-Day   SMA

20.12

100-Day   SMA

19.05

200-Day   SMA

19.01

 

E = Earnings Have Been Inconsistent                             

Earnings might remind dedicated baseball fans of the Brett Saberhagen trend. For those who aren’t familiar with this trend, he was terrible one year and great the next. This pattern continued throughout the majority of his career. Chesapeake seems to be following a similar path. Since earnings are so inconsistent, we have to look at revenue for a better idea of the company’s progress. Revenue had improved in 2010 and 2011, but there was a setback in 2012. This is a somewhat common trend throughout the broader market. However, unlike most companies throughout the broader market, Chesapeake hasn’t managed to exceed its 2008 revenue, which is a sign of weakness.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

15.16

9.00

10.98

13.97

13.41

Diluted   EPS ($)

6.91

-0.28

1.52

-5.32

4.74

 

When we look at the previous quarter on a year-over-year basis, we see a decline in revenue and an increase in earnings. However, revenue and earnings have both improved on a sequential basis.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

3.84

3.45

3.22

3.33

3.41

Diluted   EPS ($)

-0.72

4.28

-0.18

0.24

0.40

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Many low-cost producers are still waiting for natural gas prices to increase before increasing production. Will this take place prior to deleveraging and what can be defined as deflation in the United States? If the future is likely to present such an environment, is Chesapeake a safe place to be?

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Conclusion

Chesapeake is definitely on the correct path. However, it might be too little too late. If the global economy continues to weaken, then Chesapeake will have to fight hard just to break even. In the current economic environment, the majors like Exxon Mobil (NYSE:XOM) and Chevron Corporation (NYSE:CVX) are safer alternatives.

As far as Chesapeake is concerned, it’s likely to be a long-term winner, but there could be some difficult times ahead (next 1-3 years). Chesapeake is a WAIT AND SEE.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.