The recent fade of CHK stock only adds to the long-held frustrations of the owners of CHK. Chesapeake Energy stock has looked attractive for most of the last three years; I’ve recommended it myself on several occasions, while also highlighting the many risks posed by CHK stock.
And Chesapeake Energy stock has made gains from time to time, climbing from $3 to $5+ last year, and doubling off its late December lows in the first part of 2019.
Once again, however, CHK stock hasn’t been able to hold its gains. And it’s worth wondering when, if ever, that will change.
In mid-2014, the shale bubble started to burst, and CHK stock was hammered. It was valued at $30 in mid-2014; in less than two years, CHK traded below $2 as bankruptcy rumors swirled.
Since then, debt has been a big part of the contentions on Chesapeake Energy stock, by both sides. Bears and skeptics argue that CHK is one more oil price downturn away from bankruptcy fears returning. But in any case, the debt continues to weigh on the company and on CHK stock, limiting its ability to be as aggressive as it would like to be.
For bulls, particularly from a valuation standpoint, the debt is a plus. CHK has a market cap of about $4 billion, which combined with that $10 billion in debt gives it an enterprise value of $14 billion. If one values Chesapeake’s business at $1.4 billion, the value of CHK stock would jump 35% to $5.4 billion.
So, fundamentally, the volatility of CHK stock makes some sense. And the recent downturn to $2.44 makes Chesapeake Energy stock more attractive, at least on paper. Another debt refinancing has pushed out maturities, giving the company breathing room. CHK continues to shift toward higher oil production, away from its legacy focus on natural gas, even as optimism toward U.S. shale oil is rising.
CHK’s acquisition of Wildhorse Resource Development seems to be a solid move, as I wrote when the deal was announced. It provides a larger asset base to back the debt – and more earnings to pay it off. And the company has shifted capital expenditure dollars to the Powder River Basin, where its acreage is performing exceedingly well at the moment.
It seems like Chesapeake Energy itself is making progress. Yet Chesapeake Energy stock, save for the December bounce, isn’t.
There are two broad issues at play when it comes to CHK stock. The first is that even with the recent bounce in oil prices, exploration and production stocks aren’t doing all that well. Chesapeake Energy stock has lost about 28% of its value over the past year; but that performance is about average for its sector . Oil prices have fallen over that stretch, weighing on the sector’s stocks.
The second is that investors’ patience with CHK stock likely is running out. Every Chesapeake earnings report seems to highlight CHK’s potential. But its results simply haven’t improved.
Chesapeake has been targeting positive free cash flow for years, but it hasn’t achieved that goal and probably won’t this year. CHK has predicted that its adjusted EBITDAX (earnings before interest, taxes, depreciation, amortization, and exploration expense) will come in at $2.55 billion-$2.75 billion. But its interest expense of $500 million-plus and its expected capital expenditures of $2.1-$2.3 billion more than offset that.
Chesapeake has been promising to pay down its debt for years. At the end of 2015, its long-term debt was $10.35 billion. CHK’s debt is now nearly $10 billion, thanks to debt it assumed as part of the Wildhorse deal.
The problem with the company’s fundamentals, and with CHK stock, is that on paper, there’s reason for optimism, but in practice, that optimism never seems to last.
On paper, bulls’ contentions make some sense. And one thing CHK stock has proven is that it can bounce, even if those bounces soon fade. Certainly, nimble traders likely have done well with CHK, and that may be the case going forward as well.
For investors, however, the decision is a little tougher. The acquisition of Anadarko Petroleum (NYSE:APC) by Occidental Petroleum (NYSE:OXY) could lead to more M&A activity in U.S. shale. But Chesapeake, given its huge levels of debt, probably won’t become a takeover target.
Even with Chevron (NYSE:CVX) likely on the prowl after losing out on Anadarko, and majors like Exxon Mobil (NYSE:XOM) potentially looking for shale assets, there are reasons for them to pass on CHK, at least in the near-term. And with the sector’s stock prices still down over the past year, there are other, less-indebted, names that might be worth considering.
I’m personally not ready to abandon my long-term bullishness on CHK stock just yet. But at a certain point, it’s too difficult to keep fighting the tape. CHK stock has become a “show me” stock at this point, and other stocks seem to be better choices right now.
Doug Lawler became the CEO of Chesapeake Energy Corporation (NYSE:CHK) in 2013. First, this article will compare CEO compensation with compensation at similar sized companies. Then well look at a snap shot of the business growth. Third, well reflect on the total return to shareholders over three years, as a second measure of business performance. This process should give us an idea about how appropriately the CEO is paid.
Our data indicates that Chesapeake Energy Corporation is worth US$4.2b, and total annual CEO compensation is US$23m. (This number is for the twelve months until December 2018). Thats a notable increase of 53% on last year. We think total compensation is more important but we note that the CEO salary is lower, at US$1.3m. We looked at a group of companies with market capitalizations from US$2.0b to US$6.4b, and the median CEO total compensation was US$5.2m.
As you can see, Doug Lawler is paid more than the median CEO pay at companies of a similar size, in the same market. However, this does not necessarily mean Chesapeake Energy Corporation is paying too much. A closer look at the performance of the underlying business will give us a better idea about whether the pay is particularly generous.
Chesapeake Energy Corporation has increased its earnings per share (EPS) by an average of 128% a year, over the last three years (using a line of best fit). It achieved revenue growth of 6.8% over the last year.
Overall this is a positive result for shareholders, showing that the company has improved in recent years. Its good to see a bit of revenue growth, as this suggests the business is able to grow sustainably. Shareholders might be interested in this free visualization of analyst forecasts.
Given the total loss of 38% over three years, many shareholders in Chesapeake Energy Corporation are probably rather dissatisfied, to say the least. So shareholders would probably think the company shouldnt be too generous with CEO compensation.
We compared total CEO remuneration at Chesapeake Energy Corporation with the amount paid at companies with a similar market capitalization. Our data suggests that it pays above the median CEO pay within that group.
Importantly, though, the company has impressed with its earnings per share growth, over three years. Having said that, shareholders may be disappointed with the weak returns over the last three years. So shareholders might not feel great about the fact that CEO pay increased on last year. One might thus conclude that it would be better if the company waited until growth is reflected in the share price, before increasing CEO compensation. Whatever your view on compensation, you might want to check if insiders are buying or selling Chesapeake Energy shares (free trial).
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.