By Sept. 30, shares of CHK looked very cheap, with a book value of over $20 and a price-to-earnings-to-growth (PEG) ratio (five-year expected) of only 0.29. That's why the following one-year chart does a good job of telling the story of the stock price and what helped to drive it up so powerfully.
CHK data by YCharts
That green line is CHK's diluted quarterly EPS, and what went way up in the second quarter of 2013 certainly fell down hard in the third quarter. Part of the reason for this may have to do with some of the negative repercussions from CHK selling off large chunks of its multiplicity of holdings.
For example, in conjunction with a number of transactions to sell its pipeline business for more than $4 billion, the company obligated itself to transport a specified amount of natural gas on lines using Access Midstream Partners (ACMP), which now owns part of the pipelines that CHK sold. There's a costly catch to this commitment.
That's because Chesapeake is cutting back on drilling for new wells near ACMP's pipelines, and thus the company isn't using the pipeline capacity it had reserved. It could now have to pay for this obligation whether it uses it or not. That could add up to a painful $400 million that CHK would owe Access over the next five years to cover any shortfalls.
The new CEO of CHK, Doug Lawler, and his executive team have promised to address these issues, curtail spending and improve the company's bottom line. As the chart above plainly illustrates, the future of CHK and the value of its shares will depend on those expenses going down, revenue going up and EPS doing the same.
Investors will be listening carefully to the next earnings conference call, and I would encourage investors who own shares or are looking to accumulate CHK to be cautious until all the facts are on the table and in the spotlight.
I'm not saying that CHK isn't a worthwhile speculation at current price levels. What I am saying is that Chesapeake Energy is only offering a 1.35% dividend payout to reward investors who don't know for sure if the company can cut costs enough while it ramps up production.
Investors also need more clarification about its obligations from the past sales of its now smaller dominion. Those answers will probably have to wait until the third week in February, and that is well worth the wait.
At the time of publication the author had no position in any of the stocks mentioned.