Due to an overwhelming rise in international demand for oil and gas, energy producers have remained perpetually unscathed during the economic crisis. As a result, leading investors have shifted their investment focus to these stocks given predominantly turbulent market conditions. In this article, the subject of my extensive financial analysis is Chesapeake Energy (CHK), which is hinging its future on global market LNG exports to buoy the price of nat gas.
Sizable year-end profits and impressive quarterly growth are other factors that have enabled the stock to widen its competitive moat and establish a strong presence in emerging global markets. The company has achieved this by redirecting its strategic emphasis to core development projects, announcing new acquisitions, making smart investments in profitable ventures, divesting all non-core assets, and introducing strategic expansion policies.
Chesapeake ranks among the largest producers of oil and natural gas in the United States with investments in 46,000 oil and gas wells across the nation. Although the company's financial performance was not as impressive as was speculated by analysts in 2009 and 2010, the previous year saw the stock stage a dramatic comeback amidst predominantly favorable market conditions and renewed investor sentiment.
As a result, Chesapeake recorded an impressive net income of more than $1.8 billion, with a 56% increase in oil production and an 11% increase in production of gas. Moreover, revenues of almost $4 billion for Q3 comfortably exceeded figures of $2.58 billion for the previous year. Finally, the stock ended 2011 with the perfect finish by declaring dividends of $0.08 a share.
A strong financial performance in the previous year, healthy dividend yield and impressive cash flow has provided Chesapeake with the impetus to push for higher growth margins in the current year. The stock's performance this year has been impressive thus far with the overall market capitalization exceeding $14.75 billion and average trading volume crossing $15.5 million.
Earlier this year, investors reserved a fair deal of skepticism regarding the performance of the business after the trading price plummeted down to as low as $20. This was a major shortcoming for the stock considering the fact that heavy trading had pushed trading price up to as high as $35.75 last year.
However, looking at other leading financial indicators of the business this year and its overall performance in the first fiscal quarter of 2012, investors have been seen to reinforce their faith in the stock, causing it to gain quickly amidst aggressive trading and favorable investor sentiment. Currently, the stock is trading at a price of nearly $22 which is fairly reasonable when the current economic outlook is given consideration.
Chesapeake has a price to earnings ratio of 10.33 which is impressive when judged by industry standards. Moreover, the stock pays $0.09 in dividends to investors on earnings per share of $2.14. A good dividend history, combined with a dividend yield of nearly 1.6% is certainly another factor that has attracted favorable investor sentiment for the business, even in predominantly negative market conditions.
In the last quarter of 2011, the stock recorded a yield of nearly 8.6% which largely played a role in the positive investor sentiment that the stock has enjoyed this year. This has allowed Chesapeake to pay handsome dividends in the first quarter of 2012. Investors see these as promising signs of future growth with the company already actively redirecting its strategic focus to liquids.
In looking at competitors, Suncor Energy (SU) is a subsidiary of a parent company based in Canada which is the largest producer of oil in terms of volume. The company's performance in the previous financial year was commendable, recording significant growth in revenue and EPS. Impressive cash flows and solid financial standing at the close of last year also made the stock an attractive investment option in the market.
The stock has failed to translate its positive upward movement of last year into an impetus that would drive growth and higher ash flows in the current financial year. I believe that the underlying reason for the stock's dismal performance as well as dwindling revenue margins in the first quarter is its heavy reliance on global oil demand and price. Another certain reason is the massive oil reserves of the stock that levy a high operational cost. This makes it increasingly difficult for the business to consistently meet its dividend commitments. Therefore, I rate Chesapeake as a better and more viable investment option.
Another competitor, Anadarko Petroleum (APC), has a market capitalization of over $43 billion and an average trading volume of $3.5 million, both of which are considerably lower than Chesapeake's. The company suffered heavy losses last year which was largely the brainchild of the ignominious Deepwater Horizon debacle that cost the business nearly $4 billion in settlement. This continues to be a point of concern for most investors as the business has yet to report any sizable gains in the current financial year. Chesapeake, on the other hand, has currently enjoys favorable investor sentiment and looking at the positive financial outlook for the business, I believe that it is going to surge.
ConocoPhillips (COP) is enormous with a staggering market capitalization of $95.5 billion and an average trading volume of nearly $10 million. However, the stock has been seen following a downward trend recently after it staged a remarkable rampage on the stock market in the last two fiscal quarters that allowed it to record impressive revenues of nearly $3.4 billion pushing its earnings per share to $2.56 per share. However, trading price has consequently plummeted down to around $73 from $81, and the stock continues to show unmistakable signs of downward movement. This has evoked a fair deal of skepticism in the minds of investors who are reluctant to invest in the stock, being increasingly uncertain as to which course it will take.
Looking at Chesapeake's impressive performance in the current fiscal quarter, it is evident that the stock has the capacity to outshine its peers this year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.