Chesapeake: Hedge Fund at Risk If Earnings Fall

On Tuesday, Chesapeake Energy (CHK) will release its third-quarter earnings and operational results. Analysts’ consensus estimates suggest a negative adjusted EPS of 10 cents. In the third quarter of 2018, the company’s EPS was 19 cents.

Chesapeake: Hedge Fund at Risk If Earnings Fall

On average, WTI crude oil active futures have fallen 18.7% between the third quarter of 2018 and the third quarter. Natural gas prices have fallen 18.8% during the same period. The calculation is based on the average closing prices between the third quarter of 2018 and 2019. The earnings might be negative due to weaker commodity prices. 

Hedge fund at risk

Franklin Resources is Chesapeake Energy’s largest institutional holder. The hedge fund has a 12.4% stake in the stock. In the first quarter, Chesapeake Energy accounted for 25.8% of Carlyle Group. During the same quarter, the firm bought a fresh stake in Chesapeake Energy. In the next quarter, the total portfolio exposure to Chesapeake Energy fell by nine percentage points. At 16.8%, Chesapeake Energy is an important holding for Carlyle Group. Another fall in the company’s stock prices could impact the investment firm. On a year-to-date basis, Chesapeake Energy’s stock prices have fallen 31.4% as of November 1.

Similarly, the company is Schneider Capital’s seventh-largest holding. The investment firm reduced its holdings in the first two quarters of 2019. However, Chesapeake Energy’s stock price movement could impact five percent of the total portfolio. The company has been Schneider Capital’s holding since 2008.

Analyst are bearish before Chesapeake Energy’s earnings

Among the 25 analysts tracking Chesapeake Energy, 12% recommend a “buy,” 48% recommend a “hold,” and the rest of the analysts recommend a “sell” or “strong sell.” 

In the past few months, the “buy” recommendations have fallen for the company’s stock prices. During this period, analysts’ mean target price also fell. The bearish outlook for oil and natural gas prices might have been behind the fall. Analysts’ mean target price for Chesapeake Energy suggests a possible 16.6% upside from the last closing level.

On October 21, Suntrust Robinson reduced its target price on Chesapeake Energy by around 50% to $1. Susquehanna also reduced the target price by $1 to $2. On November 1, Chesapeake Energy’s stock prices closed at $1.44.

Chesapeake Energy’s moving averages

On November 1, the 100 and 200-DMA (day moving average) at $1.6 and $2.18 are important resistance zone for the stock prices. However, the 50-DMA at $1.48 will be critical for Chesapeake Energy’s stock prices this week. Better-than-expected earnings could help the stock prices overcome this resistance zone. However, any disappointment in Chesapeake Energy’s earnings and operational results could push the stock near its 20-DMA at $1.37.

In the last trading session, the company’s implied volatility was at 100.22%. EQT and Cabot Oil & Gas’s implied volatility was 64.1% and 29.5%. Higher implied volatility suggests that the market expects large movements in Chesapeake Energy’s stock prices.

In the next five trading sessions, the company’s stock prices could close between $1.27 and $1.61. The implied volatility and confidence level at 68% impacts the price range. The price calculation is also based on the normal distribution of prices. As we discussed, any surprise or disappointment in the earnings might force the stock prices to break this price range.