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TheStreet Open House

The Best Reason to Sell Chesapeake Shares

Stocks in this article: CHK

NEW YORK ( TheStreet) -- There are plenty of reasons an investor could use to make the case to sell shares of Chesapeake Energy (CHK), but right now the best argument may be that the all-important liquids production growth story is showing signs of vulnerability.

Chesapeake's balance sheet issues are well known and already account for the big discount its shares trade at relative to peers and relative to its assets. The range of Wall Street ratings on the company already clearly defines the glass half-full or half-empty argument.

Analyst David Heikkinen of Tudor Pickering has a $51 price target on Chesapeake shares, which more or less implies that the company deserves full value today for its collection of assets, regardless of its balance sheet concerns.

Is the Chesapeake Energy liquids growth story less than it's talked up to be?

Joseph Allman of JPMorgan has a $14.50 price target on Chesapeake, and argues that the company's funding gap may be difficult for Chesapeake to bridge with its cash flow diminishing amid low natural gas prices and with any difficulty in monetizing assets the company has talked up.

Yet when Chesapeake Energy declined after its earnings report this week, it was not as if any of these Chesapeake battlegrounds were new, and there was not incremental information regarding these issues. Chesapeake recently announced a plan to monetize as much as $10 billion to $12 billion in assets as a way to put to rest the concerns about its funding gap.

Given so much of the Chesapeake story already being known and debated ad nauseum, there are two reasons that shares declined after its earnings report. First, the stock had rallied sharply this year, and is still up close to 10%. Profit-taking in shares of a company with an uncertain future makes sense when the opportunity arises. Chesapeake Energy has been better as a trade than as a long-term holding in recent history.

It may not only be profit-taking, though, that motivated some investors to sell Chesapeake shares this week. The company is guiding to higher and higher liquids production as a way to prove that while it's still roughly 80% natural gas production today, that's going to change to a significant degree in the next three years -- 50% production growth targeted and the majority liquids-based. However, the latest commentary on its liquids portfolio was either incomplete or incrementally negative.

In the least, the mixed commentary on Chesapeake's shale play results suggests caution for what at the end of the day is the most important production driver for this company. Even Chesapeake Energy bears have always said it has a great collection of assets. However, some of the assets don't look quite as great as Chesapeake once said they would look based on its latest report.

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