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.