Chesapeake Energy (CHK) is the second-largest producer of natural gas in America today. It owns over 15 million acres of oil fields in the country.
The stock price of Chesapeake is hovering around $14. This is close to its 52-week low, which is a benchmark that was actually set recently with the news of the company's delayed sale of assets. The company reported a loss for the first quarter of 2012, although it was not as much as the company lost in the first quarter of 2011. The firm had a net loss of $71 million for the quarter, -$0.11/share, vs. its loss of $205 million, or -$0.32 per share in 2011. The revenue was 50% higher from 2011, at $2.4 billion. It also issued a $0.35 dividend for the first quarter, which is only 2% of the firm's total stock price.
The results were still not as good as analysts expected. Most were anticipating profits of around $0.29 per share and revenue of $2.75 billion. So these results were still disappointing to Wall Street, despite the improvement from last year. The price-to-sales ratio is .89. This is comparable to two of the company's main competitors, Exxon Mobil (XOM) and Chevron (CVX). These firms have ratios of .86 and .87, respectively. Chesapeake did have a 15.08% profit margin for 2011. This is significantly better than three of its' main competitors, BP (BP), Total SA (TOT) and ConocoPhillips (COP). However, even though this number was high, the firm's net income has been very inconsistent over the past eight years. While the revenue has stayed relatively steady, the net income has been very up and down.
I would not recommend this company for your portfolio. The one thing to like about Chesapeake is that it is significantly undervalued. The company currently has a market capitalization of roughly $10.86 billion and an enterprise value of around $24.63 billion.
However, it is also risky. The firm has not proven it can stay profitable over the long term. There is no reason to expect that to change in the future, as you are about to find out.
The main project the company is working on is investing more money into the Mahoning Valley in Youngstown, Ohio. It has already been in the area for a long time, but it is planning on ramping up production significantly. One of the main reasons for this is that it is trying to move away from dry natural gas, because of the current cheap price and low profits. Mahoning Valley is thought to contain a greater amount of fluid-based natural gas.
In reality, the firm is still in the beginning stages of developing the area. It just drilled 59 wells in Ohio, but only nine of them are currently in production. The company currently has 10 drilling operations in the region already. However, it is planning to increase that number to roughly 13 by the end of 2012, and 22 by the fourth quarter of 2013. This should give it a competitive advantage over some of its more natural gas reliant companies.
Unfortunately, the company has been in the media for all the wrong reasons recently. One reason is the lawsuit shareholders are filing against the company for the exorbitant personal travel expenses of its executives. Basically, Chesapeake owns the most fractional aircraft shares in America. The firm has partial shares in 21 aircraft, which are managed by NetJets. The jets range from mid- to full-size planes. This is the equivalent of owning 5.9 jets outright. The next company, Microsoft, only owns around 1.6 aircraft.
In other words, Chesapeake owns almost four times as many jets as any other firm. The reason it has shares of planes instead of outright ownership is that shares offer more flexibility. If it were to own the planes outright, it would have to maintain them, which would create another expense. The buyers are then allowed a certain amount of hours to fly the plane annually. Since purchasing such a huge quantity of these planes is so pricey, the expenses really are not appropriate unless the firm had to have 10-15 flying every single day.
The shareholder litigation is claiming the company has misrepresented the expenses by up to $10 million annually. The firm's response was that the aircraft are mostly used for business. It also said the executives informed the firm they were more productive and achieving a better work/life balance because of the planes.
One potential thing that could keep the company afloat is the $3 billion loan it just got from Goldman Sachs and Jefferies Group. This gives the firm a greater amount of time to sell its assets and reduce its levels of debt.
The company has been selling much of its oil and gas assets recently. However, Chesapeake recently stated that the sale of some of its things might be delayed. This raised concern among investors about the loss of cash the delay would result in. This in turn produced many of them to sell their shares, which is why the stock recently went down 13.8% to $14.81.
However, the news of the loan sent the shares back up 3.7% in evening trading, since the company now has more time to sell its possessions. This just gives the company some more financial flexibility, while it is selling its assets for the rest of the year.
The firm is planning on doing $9-$11.5 billion sales in assets for the rest of 2012. It will obviously use a portion of the sales for paying the loan back. Overall, it is looking to get rid of up to $14 billion in assets for 2012, counting what it had already sold.
One of the most prominent recent news stories about the company is the $450 million personal loan the former CEO Aubrey McClendon got from one of the company's backers. The financing was provided by an investing group called EIG Global Energy Partners, which is also the firm that gave Chesapeake a $1.25 billion financing loan at the same time.
This loan is why McClendon was asked to step down from his role as chairman. However, the damage was already done to the company's image in the eyes of the shareholders.
Chesapeake is not a good purchase at this time. Obviously it has a checkered past, and it really doesn't seem to have a clear direction going forward. Sure, it is investing some more money in rigs in Mahoney Valley, but it is unlikely that this will outweigh the poor financial management.
As mentioned, the revenue from the firm has been fairly stable over the last eight years, having risen every year but one. However, the net profits have been very sporadic during that time. Combined with the negative publicity the firm has received from the personal travel and oil rig blowout, the company's future is in serious question.
Really, the only thing to like about this company is the undervalued stock price. Its market capitalization is roughly $14 billion below the enterprise value, meaning there might be some room for growth in the future. However, the company has not demonstrated the ability to keep expenses under control.
The bottom line is that this is a very risky stock. There is plenty of upside potential if the company somehow turns things around, but that is unlikely.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.