Earlier this year, Chesapeake Energy (CHK) said it may run out of cash as soon as 2013. So CEO Aubrey McClendon has used much of his time to find buyers for gas fields and pipeline networks to finance his push to slash debt and transform the second-biggest U.S. gas producer into an oil company. Is it time for investors to look at the stock and its deeply discounted price?
J.P. Morgan chimes in on CHK's midstream asset sales and takes a position that it will under perform.
"CHK announced that, by YE12, it will sell the majority of its midstream business to Access Midstream Partners for $2.16 Bn. It also expects to sell, during 1Q13, its remaining midstream assets, also to Access, for $425 MM (no purchase and sale agreement yet), making the total sale $2.585 Bn. This transaction, though $100 MM lower than CHK had previously disclosed, enables the company to avoid an immediate liquidity pinch. Chesapeake still has a lot of assets to sell to avoid further liquidity issues during 2013. Valuation wise the stock is not cheap, and the company still has financial risk, so we maintain our Underweight rating."
Taking into account the opinion of JP Morgan, is the lower price attractive enough to offset the challenges the company still faces?
Is Chesapeake Energy expensive at its present price?
Let's look at two simple valuations on the stock, the P/E Ratio & PEG Ratio. I like what I see in the P/E Ratio and I believe it reflects the aggressive sales of assets to address the debt the company faces. According to Forbes, the ratio has lowered, 26 weeks ago 7.4 and 52 weeks ago 12.4 while the industry is 18.8. If the ratio is increasing, the company is being financed by creditors rather than from its own financial sources which may be a dangerous trend. Lenders and investors usually prefer low debt-to-equity ratios because their interests are better protected in the event of a business decline.
On the other hand, I am not enthused with the PEG Ratio which really determines whether the stock is cheap or expensive. According to Yahoo Finance, the PEG Ratio for CHK is (-21.23). The negative number usually is an indicator of declining earnings. Sometimes it is a bad signal but not always. Sometimes earnings growth will not take place while companies attempt to improve free cash flow. While this is true for CHK, it also continues to sell assets to stay ahead of debt.
After the move down through mid November, the stock looks like it has been consolidating in a small symmetrical triangular pattern. This is usually a continuation pattern. As it consolidates, the RSI indicator has been below the '50' mark and this shows a weak bearish lean as it consolidates. The MACD is also in bearish territory, but the MA's continue to show upward mobility. I guess it is good that the RSI is steady and not moving down at all. Between the two there is no indication of any movement anyway. After the steep move down, the Bollinger Bands are moving sideways so this would confirm the consolidating. In rare occasions, a symmetrical pattern like this can be a reversal pattern. But I would have to identify strength in the consolidating phase and I just do not see enough of that yet.
What is the Skinny on the Company?
The decline in revenue this year has also affected earnings per share for investors. This in turn decimates its value as it has lost 26.29% over the last year and 359% in earnings value year over year according to The Street Wire. Does the huge discount in price warrant labeling the stock a good buy for investors right now? For 2013, earnings are expected to continue to decline. A signal I like to use to identify the timing for investing in a stock is the ROE. It is no secret that the company's return on equity has contracted over the last year. It even makes sense that it would. The ROE for the company is (-6.02) while the industry average is (13.42). I really would like to see this turn around before I would consider it a good investment. With minimal earnings growth expected and the struggle with net income and ROE still prevalent, I believe the investment in CHK right now would be risky.
I personally believe the company has done well dealing with debt and liquidity challenges but I am not sure if that can offset the deep hole it still remains in. I would not expect the company to be the best income or growth investment choices in the market right now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.