Chesapeake Energy Corporation (NYSE:CHK) is America's second largest natural gas producer and the 11th largest producer of liquids in the country. That being said a company can be an industry leader and not a great investment. So, let's drill down deeper into Chesapeake Energy's stock and see what a financial ratio analysis tells us about the company as an investment.

Financial ratio analysis on growth
Chesapeake Energy grew from a startup seeded with $50,000 from its founders in 1989 to one of the top oil and gas producers in the country just over two decades later. However, the company's growth rate has slowed in recent years as too much debt put the brakes on its ambitious empire building. That being said, the company is still projecting solid growth over the next few years. Let's take a closer look at Chesapeake Energy's growth and compare it to some notable peers: EOG Resources (NYSE:EOG), Royal Dutch Shell (NYSE:RDS-A)(NYSE:RDS-B), Devon Energy (NYSE:DVN), ConocoPhillips (NYSE:COP), and Pioneer Natural Resources (NYSE:PXD).  

Company

2Q14 Production

Projected Production Growth Rates

Royal Dutch Shell

3,077 MBOED

Low single digit growth

ConocoPhillips

1,556 MBOED

3%-5% growth per year through 2017

Chesapeake Energy

695 MBOED

7-10% adjusted growth in 2015

Devon Energy

667 MBOED

Mid-single digit growth

EOG Resources

591 MBOED

~10% growth through 2017

Pioneer Natural Resources

183 MBOED

16%-21% growth through 2016

Sources: Company press releases and investor presentations. (Note: MBOED stands for thousands of barrels of oil equivalent per day.) 

What we can note from this is that given its current daily production rate Chesapeake Energy's projected production growth rate really is right in line with its closest peers. It's not growing as fast as the smaller Pioneer Natural Resources, but it is growing a lot faster than big oil giant Royal Dutch Shell.

However, when it comes to turning that production growth into earnings growth, Chesapeake Energy comes up a little short. According to analysts, the five year projected earnings growth rates of the group as well as the price to earnings growth ratio, or PEG ratio, are as follows:

Company

5-yr earnings growth rate

PEG Ratio

Royal Dutch Shell

5.50%

1.65

ConocoPhillips

8.34%

1.31

Devon Energy

14.49%

0.73

Chesapeake Energy

6.47%

1.93

EOG Resources

10.47%

1.61

Pioneer Natural Resources

17.35%

1.9

Data from Zacks Investment Research via Nasdaq.com

What we see from this is that chart the Chesapeake Energy's earnings growth rate is projected to be similar to a company with more than twice its current production rate. Worse yet, investors are paying up for that growth as the company's PEG ratio is almost 2 when a ratio below 1 is considered cheap. Instead, a company like Devon Energy would be more appealing as it is projected to grow earnings at a faster clip and its stock is selling for a cheaper valuation.

Financial ratio analysis on returns
One of the reasons Chesapeake Energy's earnings aren't expected to grow as fast as most of its peers is because the company is still, at its core, a natural gas producer. Last quarter 72% of its production was natural gas compared to just 33% for Pioneer Natural Resources, 11% for EOG Resources, and 43% for Devon Energy and ConocoPhillips. While Chesapeake Energy is growing its higher margin oil and NGL production, it's not moving the needle as much as the oil focused growth at its peers.

We see this when we drill down deeper into an analysis of margins and returns by using the DuPont Model. Here are the factors of the DuPont Model:

Five Step Dupont Model

Image by author

Pop some numbers into a spreadsheet and this is what it spits out:

Conocophillips Financial Ratio Analysis

Source: S&P Cap IQ

What we see here is that Chesapeake Energy's margins are below its peers due to its high concentration of lower margin natural gas production. This lower margin production also impacts its return on equity, which is lower than most of its peers. What this tells us is that in the future Chesapeake Energy needs to do a much better job improving its margins if it wants to boost its returns. 

What can a financial ratio analysis tell us about Chesapeake Energy stock?
While Chesapeake Energy is a solid company and it's turnaround has it heading in the right direction, it still has some work to do. That outlook, however, could change as the company continues to reshape its portfolio. However, right now a financial ratio analysis tells us that its numbers are not as good as its peers, leaving us to conclude that there are better options for investors looking to find one great energy stock for their portfolio. 

Matt DiLallo owns shares of ConocoPhillips. The Motley Fool owns shares of Devon Energy and EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.