Does Chesapeake Have More Upside Potential?

With shares of Chesapeake Energy Corporation (NYSE:CHK) trading at around $21.87, 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

Everything covered in this article will be important in regards to the future potential for Chesapeake, but there is one factor that stands out above the rest, which is heavy insider buying over the past month. It’s important to understand that there has been heavy insider selling throughout the broader market recently, not heavy insider buying. Furthermore, when insiders buy with conviction, it almost always leads to higher stock prices down the road. This factor alone makes Chesapeake appealing.

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Chesapeake has shown steady revenue improvements on an annual basis, but the bottom line has been inconsistent. A lot of this had to do with heavy spending. However, with a new CEO in place, Chesapeake is more focused on fiscal responsibility, mostly by paying a lot more attention to its most profitable assets. It should also be noted that management has promised to return more capital to shareholders as soon as possible.

Q1 is old news, but for a quick overview to show the direction of the company, below are several important points:

  • 41.5 percent revenue increase year-over-year
  • Average daily production increased 7.5 percent year-over-year
  • Natural gas equivalent realized price increased 10.9 percent year-over-year
  • Production expenses decreased 18.1 percent year-over-year
  • Operation cash flow increased 237.2 percent year-over-year

It looks as though Chesapeake is heading in the right direction, and direction is everything on Wall Street.

The chart below shows some basic fundamentals for Chesapeake, Anadarko Petroleum Corporation (NYSE:APC), and Devon Energy Corporation (NYSE:DVN).

CHK APC DVN
Trailing P/E N/A 64.65 N/A
Forward P/E 10.64 16.52 11.21
Profit Margin -5.13% 5.11% -22.15%
ROE -2.65% 3.43% -9.30%
Operating Cash Flow 3.49B 8.95B 4.93B
Dividend Yield 1.60% 0.40% 1.50%
Short Position 11.40% 2.00% 2.50%

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

T = Technicals Are Strong

Chesapeake has performed well over the past year, and it has outperformed its peers year-to-date as well over the past month.

1 Month Year-To-Date 1 Year 3 Year
CHK 14.46% 33.15% 43.34% -1.66%
APC 4.32% 19.16% 52.91% 102.6%
DVN 1.20% 10.54% 0.26% -8.89%

At $21.87, Chesapeake is trading above its averages.

50-Day SMA 20.01
200-Day SMA 19.13
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E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Chesapeake is close to the industry average of 0.50. The debt-to-equity ratio is also likely to improve in the future.

Debt-To-Equity Cash Long-Term Debt
CHK 0.76 33.00M 13.63B
APC 0.66 3.74B 14.76B
DVN 0.62 6.52B 12.15B

E = Earnings Have Been Inconsistent

Earnings have been inconsistent over the years, which has had a lot to do with heavy spending. Chesapeake is now more focused on efficiency. As far as revenue goes, the pace has slowed, but there have still been annual improvements for three consecutive years. This is a positive considering many companies throughout the broader market suffered revenue setbacks in 2012.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 11,629 7,702 9,366 11,635 12,316
Diluted EPS ($) 1.14 -9.57 2.51 2.32 -1.46

When we look at the last quarter on a year-over-year basis, we see improvements in revenue and earnings. However, revenue and earnings both declined on a sequential basis.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 2,419 3,389 2,970 3,539 3,424
Diluted EPS ($) -0.11 1.24 -3.19 0.39 0.02

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

Conclusion

Chesapeake is the second largest natural gas producer in the United States, it has improved oil production, and the right management seems to be in place. At the moment, it looks as though it’s all systems go. However, Chesapeake won’t be resilient if a deflationary environment is ahead of us. Many people think inflation is the big threat, but the Federal Reserve has been fighting deflation for years for a reason.

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The bottom line is that Chesapeake is likely to be a good investment for the immediate future, but there might be serious risks in the coming years. For now, Chesapeake is an OUTPERFORM.

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.

All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t have any positions in this stock.

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