Shares of Chesapeake Energy (NYSE: CHK ) recently hit a 52-week low. Let's take a look at how the company got here and whether cloudy skies remain in the forecast.
How it got here
Chesapeake Energy has been hit by a two-pronged attack of short-term and longer-term bad news. Just yesterday, news was disclosed that Chesapeake CEO Aubrey McClendon used his stake in the company's oil wells as collateral for a private, $1.1 billion loan. Many believe that this could, potentially, create a conflict of interest between McClendon and his shareholders.
But the 800-pound gorilla that's currently haunting the natural gas sector is decade-low natural gas prices. With prices tipping the scales at levels not seen since 2001, many natural gas drillers are choosing to simply take hefty one-time charges and shutter operations until pricing improves. For Chesapeake, which is responsible for 8% of all natural gas production in the United States, this meant taking the appropriate steps to curb production by 8% and reduce dry gas capital expenditures to $900 million from $3.1 billion in 2011. Still, the company is on pace to reduce its long-term debt obligations by $2 billion by the end of this year.
How it stacks up
Let's see how Chesapeake Energy stacks up next to its peers.
CHK data by YCharts.
This sector more or less trades in tandem, but with Chesapeake's greater natural gas exposure relative to its peers', it's easy to see why it's been the underperformer of the bunch.
Return on Equity (TTM)
|ExxonMobil (NYSE: XOM )
|Devon Energy (NYSE: DVN )
|EOG Resources (NYSE: EOG )
Source: Morningstar, TTM = trailing 12 months.
Much of the oil and gas sector is cutting back production and seems relatively cheap based on forward earnings, but each company's return on equity tells even more of the story. ExxonMobil and Devon Energy each have an ROE healthfully around 20%, while Chesapeake and EOG have much lower ROE. In short, it's taking a lot more capital to create the same earnings power than we're seeing from larger, better-diversified oil and gas operations like Devon and ExxonMobil. But don't get me wrong, with the exception of EOG Resources, these three companies look to be solid values on paper.
Now for the real question: What's next for Chesapeake Energy? That question really depends on whether natural gas supplies lessen and how long it takes for natural gas prices to rebound. Personally, I made my case in January in favor of natural gas prices, although I've been brutally wrong up to this point in time.
Our very own CAPS community gives the company a highly coveted five-star rating, with an overwhelming 97.3% of members expecting it to outperform. I have, as well, chosen to make a CAPScall of outperform on Chesapeake and currently find myself down 29 points on that call. I consider myself down, but definitely not out in this pick. Although I'm discouraged by yesterday's news and the fact that natural gas prices have ticked even lower, I see little downside left in current prices and feel that the increased demand from utilities who have switched from coal will ultimately lead to a rise in natural gas prices as supply decreases. Even assuming Chesapeake's cash flow decreases, I consider the company to be a steal at just 2.3 times cash flow and remain long and strong in my CAPS portfolio.
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