On Jun 24, 2015, shares of Chesapeake Energy Corp. CHK closed at a 52-week low of $11.55.
What Led to the Share Price Decline?
Chesapeake Energy’s financials are likely to remain under pressure due to the persistently weak commodity pricing environment. The company’s oil exposure, though limited, further increases bearishness on the stock as the commodity has plunged over 50% since June last year. With crude prices anticipated to remain weak throughout 2015, financials are likely to stay pressed.
Since natural gas accounts for the majority of Chesapeake’s production, the company’s results are particularly vulnerable to commodity price fluctuations. The company – which is the second-largest natural gas producer in the U.S. – has been in the news as it is struggling to fund its capital budget amid diminishing cash flows in a weak natural gas price scenario.
However, Chesapeake remains one of the industry’s most active players in managing asset portfolio through a combination of acquisitions and disposals. With a bigger inventory of unconventional resource potential than probably any other domestic independent, Chesapeake boasts a leading position among the top unconventional liquids-rich plays that comprise Eagle Ford, Utica, Granite Wash, Cleveland, Tonkawa, Mississippi Lime and Niobrara. The company also enjoys a strong position in the Marcellus, Haynesville/Bossier and Barnett natural gas shale plays.
As a result of a strong first quarter, Chesapeake had increased its production guidance for 2015 to 640–650 thousand barrels of oil equivalent (MBoe) per day from 635–645 MBoe per day. The company has the deepest inventory in the pre-eminent part of the Utica as well as some of the finest locations in the Eagle Ford and Marcellus, which should help it in achieving its target.
Moreover, the company intends to undertake remarkable cost-cut efforts and hence, anticipates efficiency gains in its core operating areas. Keeping in line with this, the company announced a cut in its 2015 capital spending. This should help it to improve cash flows as the pricing weakness continues to weigh on financials. However, despite the 26% investment cut, Chesapeake expects production to grow about 3–5% from last year.
Chesapeake is on track with its plan of reducing its long-term debt by monetizing its assets and cutting lease-hold spending. This monetization initiative is mainly aimed to cope with the mounting debt level as well as to fill the funding gap for its 2015 expenditures that resulted from the volatility in energy prices.
Chesapeake Energy currently holds a Zacks Rank #2 (Buy). This indicates that the stock is likely to outperform the market in the next three to four months and the 52-week low might be a good entry point.
Other Stocks that Warrant a Look
Some other stocks worth considering in the same industry include BP plc BP, China Petroleum & Chemical Corp. SNP and EQT Midstream Partners, LP EQM. All these stocks sport a Zacks Rank #1 (Strong Buy).
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