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Summary

  • Chesapeake Energy posted exceedingly good earnings results before the bell this morning.
  • It appears the company's turnaround is ahead of schedule and the company raised guidance in addition to posting stellar results.
  • Despite the stock being at a 52 week it is still cheap based on its growth prospects and strong momentum.

I have not penned anything on Chesapeake Energy (NYSE:CHK) since early April when I noted that this energy concern that was in a midst of a turnaround was seeing significant insider buying. The company posted stellar results this quarter and it appears that its turnaround is in full swing. It also is a good time to take a look at this cheap energy play even though it is trading now at a 52 week high.

Earnings Report Highlights:

  • Earnings per share came in at 59 cents a share, more than a dime a share above expectations.
  • Chesapeake posted quarterly revenues of just over $5B for the quarter, more than $500mm over the consensus.
  • Quarterly oil and gas production totaled 675.2K BOE/D (Barrels of Oil Equivalent) up 11% year-over-year (Y/Y) after adjusting for asset sales.
  • The company raised its 2014 total production growth outlook to a range of 9%-12%, up from an earlier forecast of 8%-10% growth.
  • As importantly, Chesapeake raised the midpoint of its 2014 operating cash flow outlook by 13% to $5.8B-$6B from prior $5.1B-$5.3B due primarily to the increased production outlook

It is hard not to feel encouraged by these latest results or more confident the company is making great strides within its turnaround strategy. That strategy consists curbing spending and selling enough non-core gas fields and side businesses so Chesapeake's expenses aren't outstripping its cash flow for the first time in more than a decade.

Based on these latest results, it seems the company is making significant progress to increasing production, cash flow and providing shareholders faith that better days are ahead.

I would expect several analysts to raise the earnings estimates on CHK over the next week or so based on these superior results and upward guidance. In addition, I would be surprised if Chesapeake does not receive at least a few upgrades and/or price target hikes over that same time frame.

Despite being at its 52 week high, the potential for further upside seems strong. The stock has a five year projected PEG deeply below 1 (.42) even at these prices. Earnings look like they are tracking to better than a 30% increase Y/Y this fiscal year and Chesapeake should be able to deliver 15% to 20% earnings gains in FY2015 based on current consensus.

Given these growth prospects, CHK seems undervalued at ~12.5x FY2015 projected EPS and also pays a 1.2% dividend yield. I will add to my stake on any overall dips in the overall market. ACCUMULATE

Source: Chesapeake Energy: Turnaround Is In Full Swing