Today we assess if Chesapeake Energy Corp. (NYSE:CHK) could be a likely merger target or an acquirer within its peer group. The peer set we use for our analysis comprises: Anadarko Petroleum Corp.(NYSE:APC), EOG Resources Inc.(NYSE:EOG), Apache Corp.(NYSE:APA), Devon Energy Corp.(NYSE:DVN), Williams Companies Inc(NYSE:WMB), Noble Energy Inc.(NYSE:NBL), Hess Corp.(NYSE:HES) and EQT Corp.(NYSE:EQT).
If you missed our Fundamental Analysis on the company published earlier this week click here.Overview
- Chesapeake Energy Corp.'s relative size and current valuation make it a possible merger target within this peer group.
- Chesapeake Energy Corp. could achieve growth through acquisitions as it is big enough (by book value) and has only a modest level of goodwill on its balance sheet, but its valuation is not high enough to make acquisitions within this peer group easy.
- Downward pressure on Chesapeake Energy Corp.'s dividends due to relatively weak operating results, low interest coverage and a weak cash cushion (for the dividend) is offset by the medium dividend quality, which does not indicate the need to change dividend policy in the short-term.
- While the company's share price is sufficiently below its 52-week high (currently about 35% below) it does not have a positive free cash flow, which suggests that a share buyback at this time may not be prudent.
Company numbers are TTM (trailing twelve months) or latest available. Share price data is previous day's close unless otherwise stated.This report does not predict dividend or equity actions but highlights corporate actions that are supported by fundamental company performance and corporate finance principles.M&A Action
Why merge or acquire?
Companies typically acquire to realize economies of scale, scope, gain customers, bundle complementary products, or gain vertical integration. From an investor's perspective, these business reasons fall into natural screening categories that include: (a) buying companies to boost growth expectations; (b) buying to realize cost synergies; and (c) buying earnings through acquisitions that increase EPS.
Potential targets would typically be smaller than their peers though sometimes targets can be marginally larger than the acquirer. As a result, when identifying a company as a target, we check for a book value that is up to 80% more than the peer median. In addition, we also filter for a cheap valuation relative to peers (i.e. price to book is less than the peer median) and a share price that is trading sufficiently (i.e. at least 20%) below its 52-week high.
|M&A Target Conditions||Chesapeake Energy Corp.||Comparable||Pass/Fail|
|Book value||<=||1.8 x Peer median||12,265.0||23,452.6||Pass|
|% below 52-week high share price||>=||20%||34.8||20||Pass|
|Price to book (P/B)||<=||1.2 x Peer median*||0.9||2.2||Pass|
|* We use a 20% tolerance (0.8-1.2x) around the median.|
Typically, acquirers are larger than their peers though, as mentioned above, targets can sometimes be marginally larger than the acquirer. To identify a company as an acquirer, we look for a book value that is around or more than the peer median and for growth expectations (measured by its price to earnings or P/E) that are lower than peer median. In addition, we consider whether the company has the capacity to add intangible assets (like goodwill) and whether its valuation (measured by its price to book or P/B) is attractive relative to its peers.
|M&A Acquirer Conditions||Chesapeake Energy Corp.||Comparable||Pass/Fail|
|Book value||>=||0.8 x Peer median||12,265.0||10,423.4||Pass|
|Price to earnings (P/E)||<=||1.2 x Peer median*||N/A||41.7||N/A|
|Net tangible assets to equity||>=||25%||99.8||25||Pass|
|Price to book (P/B)||>=||0.8 x Peer median*||0.9||1.5||Fail|
|* We use a 20% tolerance (0.8-1.2x) around the median.|
Relative size and current market value make Chesapeake Energy Corp. a possible merger target within this peer group.
With a book value of USD12,265 million, Chesapeake Energy Corp. could be acquired by others within this peer group. It may also be a possible target now because its share price is reasonably off its 52-week high and not so high in relation to book (P/B is lower than peers) that it would deter an acquirer.
Chesapeake Energy Corp.'s relative valuation (P/B) is not high enough to suggest acquisitions in this peer group.
Chesapeake Energy Corp. could achieve growth through acquisitions as it is big enough (by book value) and has room for more goodwill on its balance sheet. Acquisitions in this peer group would be more likely if its relative valuation (P/B) was higher.
Dividend cut, increase or initiate?
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Is the company likely to buy back shares?
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Chesapeake Energy Corp. explores, develops and produces oil and natural gas properties. Its principal activities include discovering and developing unconventional natural gas and oil fields onshore in the U.S. The company has also vertically integrated its operations and owns substantial marketing, midstream and oilfield services businesses directly and indirectly through its subsidiaries Chesapeake Energy Marketing, Inc., Chesapeake Midstream Development LP, Chesapeake Oilfield Services LLC, and Chesapeake Midstream Partners LP. Chesapeake Energy operates its business though the following segments: Exploration and Production; Natural Gas and Oil Marketing; Gathering and Compression; and Oilfield Services. The Exploration and Production segment is responsible for finding and producing natural gas and oil. The Marketing, Gathering and Compression segment is responsible for marketing, gathering and compression of natural gas and oil primarily from Chesapeake-operated wells. The Oilfield Services segment is responsible for contract drilling, oilfield trucking, oilfield rental, pressure pumping and other oilfield services operations for both Chesapeake-operated wells and wells operated by third parties. The company was founded by Aubrey K. McClendon and Tom L. Ward on May 18, 1989 and is headquartered in Oklahoma City, OK.Disclaimer
The information presented in this report has been obtained from sources deemed to be reliable, but AnalytixInsight does not make any representation about the accuracy, completeness, or timeliness of this information. This report was produced by AnalytixInsight for informational purposes only and nothing contained herein should be construed as an offer to buy or sell or as a solicitation of an offer to buy or sell any security or derivative instrument. This report is current only as of the date that it was published and the opinions, estimates, ratings and other information may change without notice or publication. Past performance is no guarantee of future results. Prior to making an investment or other financial decision, please consult with your financial, legal and tax advisors. AnalytixInsight shall not be liable for any party's use of this report. AnalytixInsight is not a broker-dealer and does not buy, sell, maintain a position, or make a market in any security referred to herein. One of the principal tenets for us at AnalytixInsight is that the best person to handle your finances is you. By your use of our services or by reading any of our reports, you're agreeing that you bear responsibility for your own investment research and investment decisions. You also agree that AnalytixInsight, its directors, its employees, and its agents will not be liable for any investment decision made or action taken by you and others based on news, information, opinion, or any other material generated by us and/or published through our services. For a complete copy of our disclaimer, please visit our website analytixinsight.com.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.