Chesapeake Energy (NYSE:CHK) has passed through tough times, as the oil price collapse forced oil and gas companies to be slimmer and more efficient. Most oil and gas companies that I follow reduced their workforce by about 50%; Chesapeake Energy reduced the number of employees from 13,000 to 3,300, which is about a 75% reduction. Oil bottomed last February but is recovering now, and the macro view is very positive. As per company CEO Robert D. Lawler, the company is stable, strong and growing, and will not need to file for bankruptcy as many had predicted would happen. Based on the company’s balance sheet the stock is worthless on paper, but based on its earnings forecast I would buy CHK under $5.
Oil production growth is projected to be about 30% for Q4 2016 to Q4 2018, as per the company’s investor presentations. Based on IEA forecasts, demand is expected to dominate supply, so prices will increase accordingly.
Source: International Energy Agency
The World Bank expects natural gas prices to start increasing from 2016 onward.
Chesapeake Energy has a significant amount of indebtedness. As of Dec. 31, 2016, they had approximately $10.0 billion in principal debt (including current maturities), according to their recent SEC filing. Because of this, they are required to dedicate a substantial portion of their cash flow from operations to service their existing debt obligations. The free cash flow for fiscal 2016 was about -$1.03 billion, according to Market Watch. Total assets have decreased from $41.4 billion to $13 billion, which translates to about a 69% decrease. Long-term debt has decreased from $12 billion to $9.9 billion, which translates to about a 19% decrease. Total liabilities exceed total assets, which means that the book value per share is worthless.
Source: Company SEC filing
Analysts have predicted that the company will post earnings per share of $0.66 for fiscal 2017, according to Simply Wall St. Historically, the P/E ratios are averaged at 15. Based on the forward earnings, at the P/E ratio of 15, CHK stock is worth about $9.9 (15 x $0.66 EPS).
Source: Simply Wall St.
Insiders (company directors, officers) have a unique perspective from within the company, and have been aggressively buying company shares lately. In the last 12 months there were about 2.7 million shares acquired by company insiders. The highest purchase price was close to $7 a share. The stock is currently trading at around $5 a share; if one waits and buys CHK under $5, this would be a better deal than what even insiders paid.
Share Price Trend
As we can see from the below chart from the last four earnings, the share price tends to fall around the earnings, and after the earnings the share price tends to rise significantly. Based on this trend, I expect the share price should bottom around $4.50 or ~ $5, and should rise after that.
With earnings expected to improve from 2017 onward, the company should maintain a positive free cash flow accordingly. Financial distress will decrease once the company generates positive earnings in the coming quarters. While I still feel CHK is a risky investment, the company did survive the downturn, so it really depends upon your risk tolerance. I would buy CHK under $5. And I always recommend that you protect your positions with insurance (options).
Disclosure: I/we 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.