Chesapeake Energy = High-Stakes Poker

OKLAHOMA CITY, Okla. (TheStreet) -- For those of you who like to play high-stakes poker, have I got a game for you.

One of the biggest gambles on Wall Street right now is Chesapeake Energy ( CHK). On the long side is Carl Icahn with his 7.6% stake in the company, and he is joined by Southeastern Asset Management with their 13.6% stake.

On the other side of the table are the short sellers who are short the equivalent of 15% of the shares. Someone is going to get burned and it will be interesting to see who folds first.

Before you place your own bet, lets look at the numbers. Right now the stock has gotten a small bounce as is evidenced in the month's hourly trading chart provided by Barchart:

During the last six months, while the market as measured by the Value Line Index is about even, CHK has fallen 29%:

Chesapeake Energy engages in the acquisition, exploration, development, and production of natural gas and oil properties in the U.S. The company also offers marketing, midstream, drilling and other oilfield services. It holds interests in various natural gas resources, including the Haynesville and Bossier Shales in northwestern Louisiana and East Texas; the Marcellus Shale in the northern Appalachian Basin of West Virginia and Pennsylvania; the Barnett Shale in the Fort Worth Basin of north-central Texas; and the Pearsall Shale in South Texas.

The company also holds interests in various liquids-rich resource plays located in Oklahoma, the Texas Panhandle, West Texas, southern New Mexico, and Wyoming. As of December 31, 2011, it had interests in approximately 45,700 gross productive wells.

The company's proved reserves comprise approximately 18.789 trillion cubic feet of natural gas equivalents. Chesapeake Energy Corporation was founded in 1989 and is based in Oklahoma City, Oklahoma. (Source: Yahoo Finance profile).

Factors to consider:

Barchart technical indicators

  • 16% Barchart technical sell signal
  • Trend spotter sell signal
  • Although the stock is trading above its 20 day moving average it is still below its 50 and 100 day moving averages
  • Price is 45% off its 1 year high
  • Relative Strength Index is 51.29%
  • Barchart computes a technical support level at 15.16
  • Recently traded at 16.71 with a 50 day moving average of 18.24

Fundamental factors

  • Widely followed by Wall Street where 28 firm have assigned 36 analysts to run the numbers
  • Revenue is projected to be down 11.70% this year but expected to increase by 18.30% next year
  • Earnings are estimated to decrease by 80.00% this year but increase by 219.00% next year and continue at an annual rate of 4.48% over the next 5 years
  • These consensus numbers result in analysts issuing 9 strong buy, 7 buy, 18 hold, 1 under perform and a sell recommendation for their clients to consider
  • If these numbers are met analysts estimate investors could reap an annual rate of return in the 25% - 28% neighborhood over the next 5 years
  • The P/E is 6.96 way below the market P/E of 14.40
  • The dividend rate of 2.25% is about 20% of next year's earnings projection and below the market dividend rate of 2.40%
  • With a lot of short term debt on the balance sheet the company only has a C++ financial strength rating
  • The revenue and earnings have been depressed by a 53% drop in natural gas prices over the past year.
  • The current management is being replaced as conflict of interests have come to light
  • The company needs to shed some assets but there are few buyers in this soft market

Investor interest

  • This is a big boys game with high institutional interest on one side and short sellers on the other side
  • TheStreet Ratings gives the stock a very neutral "C" grade
  • BMO Capital recently released a favorable recommendation, while Jim Cramer gives a thumbs down
  • Recent downgrades to neutral have come from Robert W Baird and Landenburg Thalmann

Competition

For me the market is the best scorecard and over the last year Chesapeake and its major competitors have all taken a hit: CHK is down 44%, EOG Resources ( EOG) is down 15%, Devon Energy ( DVN) is down 27% and Encana ( ECA) is down 39%:

EOG Resources
  • Revenue expected to be up 9.30% this year and another 14.20% next year
  • Earnings estimated to be up 30.30% this year and another 28.50% next year

Devon Energy
  • Revenue expected to be down 6.90% this year but up 12.80% next year
  • Earnings estimated to be down 15.30% this year but up 29.50% next year

Encana
  • Revenue expected to be down 22.50% this year and down again by another 6.60% next year
  • Earnings projected to be up 61.00% this year and down 70.10% next year

Summary: This is a high-stakes poker game I'll just watch, but not buy into. I'm an investor not a speculator. I want stocks with double-digit projections of steady growth in both sales and earnings plus a solid balance sheet -- and I don't see that here. If Icahn and the institutional investors are right, the short sellers will all be covering their short positions and the stock could see a bounce. If you want to play, be nimble and watch the 20-day moving averages and the lower 14-day turtle channel for signals:

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jim Van Meerten does not have positions, long or short, in any of the stocks mentioned in this article.

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