Chesapeake Energy Corporation (CHK) is involved in the exploration, development and production of natural gas and oil properties throughout the United States. Chesapeake has a market cap of $17 billion and its stock price is around $27.
Many investors would like to know if Chesapeake is still a turnaround story or if it is now ready to trade in line with its competitors. A year ago, the company seemed to be in trouble when Aubrey McClendon, Chesapeake’s co-founder, was under investigation by the Securities and Exchange Commission and was forced to resign as the company’s director. In addition, the company’s stock was down and there was talk that the company had severe cash flow problems; all this while it was in the midst of transforming itself from a natural gas producer to a producer of oil.
Chesapeake’s increasing earnings
It was on November 2, 2012, when Chesapeake reported third quarter earnings of $-2.01 billion, that the true depths of the company’s policy blunders came to light. At that time, the company made a clear commitment towards focusing on two primary goals: reducing its $16 billion debt load and increasing its oil production.
On November 6, 2013, Chesapeake reported third quarter earnings that showed strong improvements and the company is striving to meet its goals. On a year-over-year basis, the company’s earnings were much better. Revenues were $4.87 billion, up 63.9% from $2.9 billion in 2012. Net income was $202 million, up from the $-2.01 billion loss in 2012.
Chesapeake Energy’s Turnaround
Chesapeake is a big company, therefore, it would seem logical to assume that it would take a long time to turn the company around. While the turnaround has not been dramatic, I think that it is ahead of where investors might have predicted it would be. The company’s turnaround was led by a 23% increase in its third quarter oil production. In addition, during the third quarter earnings call, the company increased its 2013 full year outlook by 2 million barrels or about 28% to 34%. The increased oil production was primarily credited by the Eagle Ford property, but the Utica, Mississippi Lime and Southern Marcellus oil fields also helped. The turnaround also included the sell-off of non-core properties, primarily the Eagle Ford Shale basin. The company reduced its long-term debt by $3.02 billion, from $15.75 billion to $12.73 billion. It increased its cash and equivalents to $987 million from $142 million, and reduced its leasehold capital expenditures by $300 million.
One of the biggest aspects of the company’s turnaround story was its stock performance. After hitting a one year low of $16.23 on December 21, 2012, the stock has moved up by 65% from its low and up by 59% on the year. The reason that this article was titled, “Will Chesapeake Energy’s stock continue to trade like a turnaround story?” was because its stock performed much better than almost any of its competitors. As for the other large independent oil and gas companies, their 52-week stock price increases were as follows: EOG Resources (EOG) stock increased by 47.4%; Anadarko Petroleum Corporation’s (APC) stock price increased by 20.7%; Apache Corporation’s (APA) stock price increased by 19.5%; and Devon Energy Corporation’s stock price (DVN) increased by 15.1%.
While Chesapeake was at a very low point one year ago, its valuations are now similar to the other large independent energy producers. Chesapeake’s price-to-earnings ratio is 19.7 and price-to-book ratio is 1.3 – overall, the two key statistics that made Chesapeake stand out were its year-over-year 63.9% revenue growth and its 300% increase in net income.
In terms of meeting its stated goals, Chesapeake’s progress has been less than overwhelming. It sold $3.6 billion in non-core assets, reduced long-term debt by $3.2 billion and increased oil production by 23%. While Chesapeake has made some improvements, it has not really made a turnaround, and may not be able to continue to outperform its peers. The fear I have about the stock performance of the independent energy producers is twofold. First is commodity prices. Over the last two months, the price of American-produced WTI crude oil has fallen 13% from around $104 per barrel to around $92 per barrel. During the same period, the price of natural gas, which is around 3.95 per MMBTU, has remained nearly even. A continued lack of pricing strength will hurt the revenues and earnings of independent energy producers.
The second fear I have about the stock performance of independent energy producers is their 2013 stock rally. The earnings growth and stock prices of energy producing companies has traditionally been slow. Therefore, after the spurt in earnings and stock prices that these companies experienced during 2013, I would look at their progress to begin to slow. I would look for Chesapeake to continue as one of the premier independent energy producing companies, however, it will no longer trade like a turnaround story, and it will fall into the same trading range as its competitors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More…)
See the article here: