uploads///HISTORICAL

Chesapeake Energy Is Trading In-Line with Its Historical Multiples

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Dec. 4 2020, Updated 10:42 a.m. ET

Chesapeake’s historical valuations

Chesapeake Energy’s (CHK) 4Q15 EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio was ~5.7x. EV is the summation of a company’s market capitalization and net debt.

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Breaking down Chesapeake’s valuation

Chesapeake Energy’s 4Q15 EV-to-EBITDA multiple is in-line with its historical average of ~5.8x. The market value of its equity declined by ~71% year-over-year. The net debt increased from ~$7.4 billion in 4Q14 to ~$9.9 billion in 4Q15. So, the net debt increased, but the market value of the equity fell even more. This led to a considerable drop in Chesapeake’s EV in 4Q15. However, the trailing 12-month EBITDA fell more compared to the EV. This explains the higher EV-to-EBITDA multiple in 4Q15.

The higher forward multiple indicates that Wall Street expects Chesapeake Energy’s EBITDA to continue to fall this fiscal year—compared to the last 12 months. It also indicates that the company will trade at a premium to its historical multiples.

Other upstream companies including Hess (HES), Marathon Oil (MRO), and ConocoPhillips (COP) saw significantly lower EBITDA levels last year compared to 2014 due to lower crude oil prices (USO). Their respective 4Q15 EBITDA for the trailing 12 months fell by 56%, 38%, and 65%. These companies account for ~5% of the Energy Select Sector SPDR ETF (XLE).

Chesapeake’s proved reserves 

As of December 31, 2015, Chesapeake had total proved reserves of ~1.5 billion barrels of oil equivalent. According to Chesapeake’s 10-K filing, the discounted value of its reserve base at the end of 2015 was ~$4.7 billion—compared to $17 billion at the end of 2014.

Proved reserves are an important metric when considering an upstream energy company’s valuation. They determine future cash flows.

In the next part of this series, we’ll look at Chesapeake’s relative valuation.

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