Argus' rating on Chesapeake Energy Corporation (NYSE:CHK) remains HOLD as the company struggles to generate cash flow, manage its heavy debt load, and adapt to a lower commodity price environment. To this end, management has worked to strengthen the balance sheet by selling less profitable assets, and has suspended the dividend to conserve cash. It has also substantially reduced capital spending and should benefit in 2017 from relatively favorable production hedges on both oil and natural gas. Despite these signs of progress, Argus believes that Chesapeake will continue to face significant headwinds during a period of low commodity prices.
CHK shares have underperformed over the past three months, falling 4.3% while the S&P 500 has gained 3.1%. They have also underperformed over the past year, falling 4.8% while the S&P 500 has gained 15.0%. However, CHK has outperformed the industry over the past year, as the energy sector ETF (IYE) has fallen 6.8%. The beta on CHK is 2.04. The CHK share price has tracked trends in the oil markets, which have been volatile. In 2013, the average price of WTI crude was close to $100 per barrel. In 2014, WTI averaged $93.17 per barrel and in 2015, $48.67 per barrel. In 2016, WTI averaged $43 per barrel. The current price is near $46. On May 4, CHK reported 1Q17 results. First-quarter revenue rose 41% year-over-year to $2.75 billion due to higher average realized prices, partly offset by lower production volume. Chesapeake posted adjusted net income of $212 million or $0.23 per share in 1Q17 (the consensus EPS estimate was $0.18), compared to a loss of $69 million or $0.11 per share in 1Q16. Adjusted 1Q EBITDA came to $525 million, up from $282 million a year earlier. On a GAAP basis, CHK reported 1Q earnings of $75 million or $0.08 per share, compared to a net loss of $1.11 billion or $1.66 per share in the prior-year quarter.
The company’s average realized oil price rose to $51.72 per barrel in 1Q17 from $37.74 per barrel a year earlier, while the average realized natural gas price rose to $3.02 from $2.29 per mcf. The average NGL price rose to $24.06 from $16.93 per barrel. Average production costs in 1Q17 were $2.84 per boe. G&A expenses (including stock-based compensation) came to $1.35 per boe. Turning to its estimates, the firm is raising its 2017 adjusted EPS forecast to $0.81 from $0.74 based on the company’s current guidance and better-than-expected 1Q17 results. Argus is maintaining its 2018 estimate of $1.15, which assumes continued benefits from cost-cutting and an average oil price above $50 per barrel next year. Argus' estimates also assume continued asset sales, and flat production after adjusting for the impact of these sales.
CHK shares appear fairly valued at recent prices near $5, toward the low end of their 52-week range of $3.98-$8.20. The shares trended down from June 2014 until mid-February 2016, then rose strongly through early December, when they traded above $7.50. However, they have fallen more than 35% since that time. The stock trades at 5.9-times the firm's 2017 EPS estimate and 4.1-times its 2018 estimate, below the low end of the five-year historical range of 7.3-25.0. It also trades at a discount to peers based on price/sales, enterprise value/adjusted EBITDA, enterprise value/total reserves, and enterprise value/daily production. The firm believes this discount valuation is warranted given the company’s heavy debt load and weak cash flow. As such, Argus' rating remains HOLD.