Chesapeake Energy shares climbed by 5% this morning but then pulled back within a few hours as Wall Street continues to be unsure about the oil and gas giant. As of this writing, the stock is up 3.29% at $4.34 per share. Last week following the company’s latest earnings report, Barclays analysts issued a very bearish report and set a $1 per share price target on its stock.
Chesapeake Energy generates value through asset sales
Chesapeake posted first quarter results that were better than expected on Thursday, sending its shares up 2%, but after Barclays’ report, the stock tanked 20% the next day, notes Bidness Etc. Analyst Thomas Driscoll used mid-cycle debt-adjusted cash flows to come up with his valuation. He said Chesapeake was trading at a 5% to 10% premium compared to its peer group or 20% to 25% when using the face value of its convertible preferred notes.
Bidness Etc. argues against that approach, however, because it de-emphasizes Chesapeake Energy’s balance sheet, which is where much of its value. Further, the company expects to divest more of its assets to conserve cash and build that balance sheet further. Management also said last week that they have signed a $470 million agreement with Newfield Exploration for its Anadarko Basin property for the purpose of monetizing it. Already this year, Chesapeake has disposed about $1.3 billion in assets.
Another thing the company has going for it is the fact that none of its debt matures this year. Also its $4 billion credit facility was reaffirmed, and management projects cash flow generation of $500 million to $1 billion. Further, Chesapeake has cut $282 million off the debt it has maturing next year.
Options for Chesapeake Energy
Investor Place notes that Chesapeake investors have had a hard time of it over the last two years as every recovery has been erased. However, the shares have also been very oversold, so the website suggests some options investors who are interested in it might want to consider. Options help manage risks whenever trying to play a stock that’s as volatile as Chesapeake has been.
The stock’s last low point was in February when the rest of the market was crashing and the shares tumbled to around $1.30, so for investors who expect a retest of this level, Investor Place suggests buying the Oct. 4.50 put for around $1.40. The website notes that in this case, a put is a better option than just outright shorting the stock because it limits the risk to $1.40 in the event that it rallies again in a big way.
Investors who expect Chesapeake Energy to return to around its high point of $7.50 per share could enter anytime soon as the website describes current levels at “effectively” a call option.