What happened

Shares of Chesapeake Energy Corporation (OTC:CHKA.Q) sold off in October, ending the month down 9.3%. The primary cause of that decline was a downgrade by analysts at Jefferies who, while noting the company's recent progress, still thought it was well behind rival drillers.

So what

In early October, the Jefferies team downgraded Chesapeake Energy from hold to sell and set their price target at $2 per share. They did so citing the company's valuation and leverage. Overall, Jefferies said that Chesapeake "has made great strides to simplify the corporate structure and asset base." However, they noted that the company still has more than $9 billion in debt, which along with high fixed costs and a comparatively weak inventory of high-return drilling locations, made them less enthused by its prospects.

A drilling rig in the middle of a green field.

Image source: Getty Images.

Instead, Jefferies thought that investors should buy Concho Resources (NYSE:CXO) and Devon Energy (NYSE:DVN), which they upgraded from hold to buy. They noted that thanks to their prime position in the Permian Basin, both companies had a vast inventory of high-return drilling locations at their disposal. For example, they pointed out that Concho had 30 to 60 years' worth of drilling ahead of it. As a result, both companies appear poised to grow at a rapid rate at current oil and gas prices, with Jefferies noting that Devon is on pace to deliver the best cash flow growth rate in its peer group through 2019. Meanwhile, the two companies have much stronger balance sheets than Chesapeake Energy. In fact, Concho has less than $3 billion in debt despite being nearly $7 billion larger than Chesapeake as measured by enterprise value.

Now what

Despite its efforts to turn things around, Chesapeake Energy still has a long way to go as it remains well behind financially stronger rivals. Therefore, last month's sell-off isn't a buying opportunity since this stock will likely underperform peers such as Devon and Concho over the long term unless natural gas prices spike.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.