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Chesapeake’s Fall: Why Investors Should Watch the Stock Closely

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Chesapeake Energy nearing 2019 low

On May 13, Chesapeake Energy (CHK) stock closed at $2.40, 12.7% above its lowest closing price of 2019. Although stock prices rebounded after its earnings disappointment, the rally didn’t continue. Since its Q1 2019 earnings results on May 8, its stock price has corrected 8%. However, in the second quarter, CHK is expected to report adjusted net income of $0.04 per share based on analysts’ consensus estimate. In fact, based on Reuters’ analyst estimates, CHK’s total revenue is expected to rise 10.4% this quarter on a sequential basis and remain stable for the rest of 2019.

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Commodity prices

In Q2 2019 so far, on average, Henry Hub natural gas active futures were down ~6.7% from the previous quarter. However, with LNG exports rising, natural gas prices might strengthen towards the end of this quarter. Also, WTI crude oil prices were up 15.2% this quarter on a sequential basis, a positive development for CHK’s stock prices. By the end of the year, CHK’s production mix in oil could rise to 26% from 19% in Q4 2018.

In Q2 2019, on average, US crude oil prices are expected to stay over the first-quarter level because of US sanctions on Iran and Venezuela along with OPEC and non-OPEC member production cuts. Moreover, for the remaining 70% to 80% of 2019 forecasted production, CHK hedged oil at $58.75 per barrel and natural gas at $2.83 per mcf (thousand cubic feet) on average.

CHK’s valuation

Currently, CHK is trading at a one-year forward PE ratio of  7.34x compared to an average of 24.8x for the S&P 500 Index (SPY) holdings in the upstream subsector. Moreover, in terms of forward EV-to-EBITDA ratio, CHK is trading at a discount of 9.6% compared to the peer average.

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