We maintain our bullish stance on Chesapeake (CHK) based on insider buying and the company's efforts to reduce its funding gap. Chesapeake, along with General Electric (GE), launched the "CNG in A Box" system, which is another milestone in the company's success. This new system compresses natural gas at the site of a filling station, and enables fleet vehicles to save up to 40% in fuel costs. The near 10% increase in gas prices over the last one week to $3.2 per mmbtu will help CHK because of its dependence on natural gas. The stock is trading at attractive valuations, with a P/S of 1x, an EV/ EBITDA of 5.2x, and a forward P/E of 14.3x.
The company's launch of the "CNG in A Box" alongside GE, will further enable it to improve its margins, and to take first mover advantage. Natural gas is a clean and abundant source of energy in the country, and this development will increase the consumption of CNG in the coming period. "CNG in A Box" is a very easy to use fueling solution, and very attractive to retailers due to its low cost, high fueling speed and simplicity. General Electric, in partnership with Peake Fuel Solutions, is making progress in infrastructure development, in order to promote natural gas as transportation fuel. In our opinion, this structural transformation of vehicles from oil to gas will increase the consumption of natural gas, and eventually CHK will have to increase its drilling activities in order to cater to the upcoming demand.
One of Chesapeake's important suppliers, Summit Midstream (SMLP), completed its IPO last week. We believe this will help CHK in taking advantage of the expected expansion in SMPL'S natural gas pipelines, and its compression system in Colorado and Texas.
Chesapeake is continuously trying to reduce its debt levels by selling assets. Selling the assets in Permian Basin, as well as selling exploration and production assets to Chevron (CVX), will enable the company to reduce its funding gap. Moreover, the company is again reviewing the compensations it pays to its vice president and other senior executives, in a bid to lower its target debt level to $9.5 billion by the end of fiscal year 2012, from $14 billion in Q2. The company cut its senior executives' and vice president's salary by 20% six months ago. Currently, the company is looking into extending the contract until the end of the fiscal year, and then revising its package after looking into the company's financial position. It has already filed its case with the United States Securities and Exchange Commission to provide it with sufficient time to comprehensively review the matter.
As we mentioned in our previous report, the stock is attractive due to its low valuations. It is trading at a forward P/E of 14.3x, at a discount when compared to the forward P/E of Anadarko Petroleum (AVP), EV Energy Partners LP (EVEP) and PetroQuest Energy (PQ) of 17.5x, 52.78x and 18x, respectively.
EV Energy Partners LP
Forward P/E (Dec 2013)