(By Mani) Shares of troubled oil and gas company
Chesapeake Energy Corp. (NYSE:
CHK) have plummeted 38 percent in the last three months and 17 percent in the last month on relentless attacks by the media, deserved and undeserved, for the excessive compensation of its CEO and board, lack of transparency, and complex financial structure.
Chesapeake shares have lost 32 percent this year, compared with 12 percent for its peer average and a gain of 4 percent for the S&P 500. The stock is now trading 58 percent off its 12-month high and 14 percent above low, compared with 31 percent and 19 percent for the peer average and 8 percent and 22 percent for the S&P.
The recent panic selloff has created a significant buying opportunity as the company has one of the most attractive asset portfolios of any E&P company. It is the largest, or second-largest, leaseholder in the top US onshore shale gas and liquids-rich gas plays, including the Marcellus, Haynesville, Barnett, Utica and Eagle Ford.
"We believe that CHK's upside potential is greater than the downside risk of sharply lower natural gas prices," Oppenheimer analyst Fadel Gheit wrote in a note to clients.
The company has recently shifted its business strategy to reduce debt and accelerate its liquids production growth, while curtailing dry gas spending to protect leases, which would benefit the share price.
Meanwhile, shares of Chesapeake are currently trading at very attractive valuation levels, and cheap on various metrics including price to earnings, price to cash flow and enterprise value to EBITDA, compared to its peer group. Debt reduction could also lead to further multiple expansion.
Chesapeake stock is currently trading at 3.6 times its 2012 estimated cash flow, compared with the large-cap E&P peer average of 4.3 times P/CF, or a 16 percent discount. Gheit's $28 price target is based on 7.9 times 2012 operating cash flow estimate of $3.5 a share, compared with 4.3 times for the peer average, based on 2012 consensus estimates.
"We believe the premium is deserved based on a large and diversified resource portfolio, strong history of execution, and other assets and investments, including its midstream and oilfield services units," the analyst noted.
Chesapeake also has an implied reserve value of below $13 a barrel, the lowest among large-cap E&P peers and a 48 percent discount to the group average of approximately $24.50 a barrel.
That said, the company is not out of the woods yet as more work still needed to be done to sort out its cash flow concerns. Fitch expects the company to be sharply free cash flow negative over the next three years. S&P also expressed similar concerns stating that the U.S. natural gas producer's liquidity as less than adequate and warned that the company could breach a financial covenant under its $4.0 billion corporate credit facility.
The company has operating cash flow of $785 million and E&P asset sales of $803 million compared to $2.5 billion in drilling and completion capital spending, $642 million in net spending on other assets, $1.1 billion on leasehold acquisitions and $56 million in dividends for a $2.7 billion free cash flow shortfall.
"We now estimate the company will face a cash flow deficit (operating cash flow less capex, acquisitions, and dividends) of $9.9 billion this year and $5.3 billion next year before asset sales, based on the recent strip"Gheit noted.
The company is accelerating its liquids production growth and asset monetization to survive the severe financial impact of low natural gas prices. Mangement is confident in its ability to sell another $9 billion to $11.5 billion of non-core assets this year and $4.5 billion to $5 billion next year to close its funding gap in 2012 and 2013 and also reduce debt.
The company has completed $2.6 billion in transactions year to date and is scheduled to complete an additional $9 billion to $11.5 billion of noncore assets in 2012. It expects proceeds to fund 2012 capex fully and reduce debt to $9.5 billion by year-end 2012.
The company believes that its net asset value is in the $50 billion to $60 billion range or $75 - $90 a share after completing the sale of its noncore assets. Gheit estimate net asset value, after noncore asset sales to be in the $22 billion to $37 billion, or $39 - $63 a share.