Current CHK Stock Info

Chesapeake Energy Corporation (ticker: CHK) is the second-largest producer of natural gas and the 10th largest producer of oil and natural gas liquids in the U.S. The company is actively selling down sections of its business to centralize focus on the Eagle Ford and Utica plays. Approximately $4 billion in divestments were made in 2013 and CHK anticipates selling another $4 billion in 2014. The company is executing a spinoff of its oilfield services unit, as announced in February 2014, and expects the deal to be complete by June 30, 2014.

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Analyst Commentary

BMO Capital Markets (05.20.14)

We’re revising our estimates and NAV based on detail shared by the company as part of today’s analyst day. We’re maintaining our Market Perform rating. We see some upside to our +$30 NAV (pro forma for the asset divestitures/monetizations and debt reduction), but don’t observe much by way of meaningful multiple compression in the out periods, despite the capital efficiency gains touted by the company, among other things. That’s all rooted in the asset base, one where returns are still dependent on NGL and natural gas prices. We see the same less compelling comparison when reviewing debt-adjusted growth measures. Included in the company’s presentation today was revised guidance for 2014 adjusted for asset sales, as well as an outlook for 2015 that calls for 7-10% production growth on capital spending of $5.5-$6.0B. That compares to our original 7% company-wide estimate on capital spending of ~$5.6B, including capitalized interest. Surprising was the more formal five-year annual production growth guidance of 7-9%. We appreciate the confidence such a multiperiod outlook implies, but don’t see much upside to the long-term commitment. Things can change for this price taker. Impact & Analysis: We scrubbed our 10 well economics models that are the engines to both our absolute valuation analysis and production forecasts. In Exhibit 1 we show the field-level returns, ranging from MS Wet at ~60% on the high end to Cleveland/Tonkawa at ~20% on the low end. We’re also modeling the sale of the oilfield services business, a change that includes debt elimination/reduction and cash dividend received. Proceeds from certain non-core asset divestitures anticipated this year and totaling ~$290 mm are also captured in our model. Valuation &
Recommendation: We rate CHK Market Perform. We see the stock trading at 6.5x our 2014 EBITDA estimate, and compressing at a not-so-fast pace in 2015 (6.2x) and 2016 (5.3x). Debt-adjusted EBITDA and CFPS growth figures are sub-20% in the out periods on our estimates. Maybe better than what the “old” CHK could have produced, but a new reality that’s fully known at this time, in our view.  


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