Chesapeake Energy Corporation (CHK) Cut On Low Natural Gas Prices

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Chesapeake Energy Corporation (NYSE:CHK) is the subject of a new Oppenheimer Holdings Inc. (NYSE:OPY) research report dated Jan. 17, 2013. The firm lowered its price target from $28 to $24 due to low gas prices, while maintaining its “Outperform” rating.

Chesapeake Energy Corporation (CHK) Cut On Low Natural Gas Prices

Here are some highlights.

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Analyst summary

The analysts kept their “Outperform” rating on Chesapeake Energy Corporation (NYSE:CHK), but they cut the price target to $24 from $28 to show lower than expected natural gas and NGL prices; this been determined by NYMEX futures on continued oversupply, but Chesapeake does not have any natural gas hedges.

The new price target is 13.6x their 2014 earnings per share estimate and 3.5x operating cash flow; both are higher than the peer average for large E&Ps, but within Chesapeake’s historical multiple range. The company plans to use divestiture proceeds to close its funding gap in 2013 and 2014 and plans to reduce its long-term debt in 2013 to the $9.5 billion target it set three years ago.

This is past its initial time frame for 2012 year-end.

Key points

Asset Sales: Cheasapeake sold $12 billion of its non-core assets in 2012; this exceeded analysts’ estimates and the assets’ book values, underscoring the quality of its core assets. The company plans to sell between $5 billion and $7 billion of assets in 2012 to close its funding gap.
Production Growth: For this year, oil production is expected to average 83 mbd; 101 mbd next year and 123 mbd in 2014, up  approximately 22% annually; NGLs will average 47 mbd, 68 mbd, and 91 mbd, up 47% and 31%, respectively. Gas production is expected at 3.1 bcf/d, 2.9 bcf/d, and 2.8 bcf/d.

Financial Outlook: Analysts expect CAPEX of $7 billion this year and $6.5 billion next year, with annual dividends of $230 million and operating cash flow of $4.2 billion and $5.3 billion, respectively. Chesapeake will use its divestiture proceeds to fund the cash flow deficits of $3 billion and $1.5 billion, and reduce long-term debt to $9.5 billion.

Relative Valuation: Cheasapeake is trading at 8.9x P/E and 2.6x P/CF vs 11.3x and 4.0x for peers; this comes by utilizng 2014 consensus estimates. Net debt ratio is 51% vs 25%, ROACE is 3% in 2013 and 5% in 2014 vs 8% and 8.6%, implied reserve value is $22.75/boe, using 15:1 gas-to-oil ratio, or 20% below the peer average.

Stock Performance: Chesapeake has increased 5.6% year-to-date vs 4.7% for peers and 3.8% for the S&P 500. Last year, it fell by 25.4% as compared to a 4.7% decline for the group and 13.4% gain for the S&P 500. Chesapeake is 32% above its 12-month low and 32% off the high vs. 31% and 13% for peers.

Chesapeake Energy Corporation (NYSE:CHK) announced earlier this week that it will report its 2012 fourth quarter and full year operational update and financial results prior to the market’s open on Thursday, February 21, 2013.

The stock is currently trading at $17.70, up 0.85%.

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