Shares trade around $27 and are down 1.1% for the year to date but are up nearly 8% for the past 52 weeks because investors have locked in their profits. Chesapeake reports second-quarter earnings Wednesday.
The stock has been up by as much as 24%, reaching $31.49 on June 24. Even more impressive, since shares reached a low of $19.32 in June 2013 Chesapeake has rewarded investors with 63% gains. Despite these gains, the stock is cheap, trading at just 11 times 2015 estimates of $2.40. This is seven points below the industry average P/E of 18.48.
Still, investors want to know how much more value management can create. It's a legitimate question. But on more than one occasion management has provided the answer.
First, Chesapeake is actively buying back its stock. Management recently discussed plans to spend $1.26 billion to take all of the outstanding preferred shares off the market. These were the shares issued by its CHK Utica unit. This is one way the company plans to make its balance sheet simpler for investors to understand.
Next, the company is actively looking for ways to secure future production growth and increase its exposure in areas where it can capitalize on improved drilling activity in the U.S.
To that end, management announced a deal with RKI Exploration in which Chesapeake will exchange 137,000 net acres and its entire interest in 67 gross wells in the North Power River Basin. In return, RKI will give Chesapeake 203,000 net acres and interest in 186 gross wells in the basis's south.
This means when it's all said and done, Chesapeake will now have almost doubled its interest in that area, a 79% stake from 38%.
This deal makes perfect sense, particularly from the standpoint that management is consolidating Chesapeake's acreage in the southern area of the Powder River. The company believes the area contains multiple stacked oil pay zones, meaning management wants to produce oil and gas in exploitable quantities.
Assuming management is correct, this means Chesapeake, which is the U.S. No. 2 natural gas producer, will have no issues with production for the next several years.
The way I see it, new CEO Doug Lawler has put in place a comprehensive plan to deliver long-term production growth for many years to come. At the same time, Chesapeake resembles a more mature company -- one that is no longer spending its way out of production weakness.
Equally impressive is the manner in which Chesapeake has sold assets to bring the company some much-needed liquidity to the business. Until there are noticeable signs of execution failures, Chesapeake will remain one of the top-performing energy plays on the market.
In the process, whether through dividends or buybacks, Chesapeake plans to reward patient shareholders with higher profits. With the stock trading at around $26 and a forward P/E of 11, Chesapeake is one of the best bargains on the market.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates CHESAPEAKE ENERGY CORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate CHESAPEAKE ENERGY CORP (CHK) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, impressive record of earnings per share growth, compelling growth in net income, attractive valuation levels and good cash flow from operations. We feel these strengths outweigh the fact that the company shows low profit margins."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth greatly exceeded the industry average of 1.5%. Since the same quarter one year prior, revenues rose by 47.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
- CHESAPEAKE ENERGY CORP reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. During the past fiscal year, CHESAPEAKE ENERGY CORP turned its bottom line around by earning $0.68 versus -$1.62 in the prior year. This year, the market expects an improvement in earnings ($1.97 versus $0.68).
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income increased by 632.8% when compared to the same quarter one year prior, rising from $58.00 million to $425.00 million.
- Net operating cash flow has increased to $1,291.00 million or 39.71% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 18.80%.
- You can view the full analysis from the report here: CHK Ratings Report