Chesapeake Energy Hit a 52-Week Low: Is Now the Time to Buy?

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 Chart

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.



Price/Cash Flow

Forward P/E

Return on Equity (TTM)

Chesapeake Energy 0.9 2.3 6.1 12.2%
ExxonMobil (NYSE: XOM  ) 2.6 7.5 9.5 27.3%
Devon Energy (NYSE: DVN  ) 1.3 4.5 9.2 23.1%
EOG Resources (NYSE: EOG  ) 2.2 6.1 15.5 9.5%

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.

What's next
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.

Craving more input on Chesapeake Energy? Start by adding it to your free and personalized watchlist. It's a free service from The Motley Fool to keep you up to date on the stocks you care about most.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Devon Energy. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy, ExxonMobil, and Devon Energy. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 19, 2012, at 3:27 PM, TheDumbMoney wrote:

    I gave you your first Rec on this one.

    IMHO, two things you missed in your January piece: 1) if memory serves, companies are legally required to drill a certain amount to keep their leases, and this won't change soon, and is the fundamental thing driving U.S. prices lower; 2) the government is very slowly, on the permitting of LNG conversion/shipping stations to export our natural gas. The one that was recently approved in Louisiana is an exception and a drop in the bucket. It will likely be at least three to four years, or more, before the legal structures change, and/or before the U.S. can itself adapt to a more natty-based energy infrastructure. In my view, the U.S. government is now opportunistically driving a form of broader economic stimulus on the backs of natural gas companies. (This is also in part what is driving the stocks of U.S. chemical companies up, since natural gas is a non-trivial component of their costs, and their oversees competitors have to pay so much more for it.)

    What we have here is not a market problem. And it has little to do with the warm winter. What we have here is a legal structure that, likely inadvertently, has conspired to make more natural gas get produced than the market dictates, but that the government, for various reasons (environmental, economic, political) is in absolutely no hurry to change.

    If your January view is a one-year view, IMHO this is a bad call. If it's a thirty-year view, it is an excellent call.

  • Report this Comment On April 19, 2012, at 5:58 PM, trin6810 wrote:

    bad mangement - bad comapny -

  • Report this Comment On April 19, 2012, at 10:48 PM, mradamman wrote:

    Can someone please explain to me how a publicly held company can privatize 2.5% of its holdings without buying any of it's own shares?

    I mean without it being a total fraud.

  • Report this Comment On April 20, 2012, at 1:30 PM, OHGtop10 wrote:

    I want to buy some chk. I like it more and more as the price goes down, but I think there may be more pressure on the stock in 2012 and possibly 2013. I am trying to buy Chk at the perfect time for the long term. IMHO I would wait until after the first quarterly report to see how their earnings and outlook is for 2012. There could also be increased shorting of CHK in the short term and in 2012.

    CHK has been shifting their resources to buy more oil rich properties in the last couple years and they have low costs to produce NG. I am just not sure that all their efforts in the last couple years will overcome, decade low natural gas prices. In addition, as I understand it 2012 will be the first year that they will really feel the low NG prices because in past most of their gas was hedged at higher than market prices. Their first quarter will give us a hint how they are going to manage over the next two years until the infrastructure in the US for NG is improved and there is the possibility of exporting.

    My question is that we have predictable catalyst for the price of NG to be sold at over 6 dollars or 300 percent plus at current prices. So what is the best way for small home gamers such as myself to invest in something now that will pay off in 3 to 5 years?

  • Report this Comment On April 20, 2012, at 1:53 PM, OHGtop10 wrote:

    One idea is to buy long term calls for 2015 when CHK is cheap. The problem is that you have to pay a good amount of premium for calls that far out. One way to decrease the premium is to buy a call spread. The other disadvantage I see to buying calls is that your timing has to be right.

    Idea two that i am dabbling with now is to buy or a similiar company that loans E and P companies money in ex-change for agreeing to sell the a percentage of NG at a set price for the life of their wells. If they could sign more deals to buy NG at 1 dollar it would make a good play on NG long term unless the company they invest goes bankrupt.

    Idea three is to invest in CQP or similar company that just got the ok to export LNG and NG in 2015 to 2016. I think they will probably need to sell stock to pay for a facility though so the best time to buy would be the best time to buy.

  • Report this Comment On April 20, 2012, at 3:07 PM, OHGtop10 wrote:

    The best time to buy CQP will be after they raise money.

    Idea four invest in other areas and keep some dry powder in 2014 for potential investments in NG.

    Idea five that has been working good up to this point. It is to buy derivative companies that benefit from low NG prices such as CF or DOW chemical.

    Idea six is to invest in NG storage such as NKA. As NG prices begin to rise. My bet is that NG storage will be able to charge a premium if gas stored was stored at 2 bucks and gas is 4 to 6 dollars.

    Personally, I wish I could buy NG at today's prices for my own personal use for the next 50 years.

    Sean and others can your feedback for other ideas on taking advantage of low NG Prices or which idea is the best. Thanks in advance.

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