A Look at Analysts’ Views of Chesapeake Energy

On August 16, BMO reduced its target price on Chesapeake Energy (CHK) by $0.50 to $2. Two days before, Susquehanna reduced its price target by 14.2% to $3. On August 23, CHK stock closed at $1.47.

A Look at Analysts’ Views of Chesapeake Energy

On August 8, UBS reduced its target price on Chesapeake Energy (CHK) by $0.60 to $1. On the same day, Raymond James downgraded the rating to “market perform” from “outperform.” CHK’s stock price declined 10.9% and reached a 20-year low on August 6 after the company announced its earnings results.

Lower natural gas prices impacted its overall revenue. Based on the EIA’s STEO (Short-Term Energy Outlook) report, the rout in natural gas prices could continue. Analysts have repeatedly reduced their target prices on Chesapeake Energy.

How is CHK’s strategy working?

The problem is not only with natural gas prices but also with rising bearish sentiments for oil prices. The IEA had already predicted another oil glut in 2020. In February 2016, US crude oil prices fell to their 11-year low due to a glut.

If oil continues its downturn, CHK’s stock price could be adversely impacted. Moreover, the shift in the production mix toward oil to insulate prolonged natural gas prices could also fail.

On July 31, Chesapeake Energy had hedged 85% of its total production of crude oil at $59.38 per barrel and natural gas at $2.83 per mcf (thousand cubic feet). The total production refers to the remaining forecast output for 2019. On August 23, active futures for US crude oil and natural gas settled at $53.24 per barrel and $2.156 per MMBtu (million British thermal units) or $2.23 per mcf.

Peer analysis

Among the natural gas–weighted stocks, Chesapeake Energy had the highest net-debt-to-EBITDA ratio of 3.2x. Cabot Oil and Gas (COG) has the smallest ratio of 0.6x. A higher ratio suggests relatively higher financial stress on the company’s balance sheet.

Chesapeake Energy is trading at a forward EV-to-EBITDA ratio of 5.1x, the second-highest ratio among its peers after COG, despite a sharp fall in its share price since its Q2 2019 earnings results.

Institutional holdings

Based on the recent institutional holdings, two of the top five investors had decreased their long positions on Chesapeake Energy stock. In Q2 2019, the Carlyle Group (CG) invested in CHK, and three of the top five institutional investors are new.

Vanguard Group reduced its holdings by the greatest amount among the top five institutional investors. In Q2 2019, AQR Capital Management LLC had exited more than 95% of its holdings on a sequential basis.