Chesapeake Energy Analysts Change Their Tune

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On Wednesday evening, Chesapeake Energy Corp. (NYSE: CHK) stock closed at $6.72. Shares dropped by more than 5% to $6.36 early Thursday morning as the company kicked off its first investor day presentation in two years.

The downturn was very likely the result of the company’s forecast for 2016 and 2017. Production growth is estimated at flat to up 3% for 2016 and at down 5% to flat for 2017. And that comes at the cost of higher capital spending. We looked at Chesapeake’s presentation in some detail on Thursday.

By the end of the day Thursday, Chesapeake stock had regained all its lost ground and added 2.8% besides to close at $6.91. But by the early afternoon Friday, shares traded down about 3% at $6.69, and that’s after several analysts raised their ratings, price targets or both Friday morning.

Merrill Lynch’s comment was typical:

With many legacy balance sheet and cost issues resolved we see a better balance of risk. … The Analyst Day addressed visibility, positioning the Oswego [formation in the Mid-Continent basin] and the PRB [Powder River Basin] as the next legs of growth over the next 5 years. Near term, management has to navigate one more year of expected cash burn and modest production declines.

Merrill Lynch raised its rating on the stock from Underperform to Neutral and raised its price target on the stock from $6 to $10.

Barclays analysts saw things differently: “We remain Underweight [on Chesapeake] shares due to high financial leverage and continued negative free cash flow outlook.” Barclays’ price target is $4, with an upside case of $15 per share and a downside case of $1 per share.

Other ratings and price target changes include:

  • Deutsche Bank maintained a Hold rating and raised its price target from $6 to $9.
  • Nomura raised its rating from Reduce to Neutral and its price target from $4 to $7.50.
  • UBS raised its price target from $4.25 to $6, with a Sell rating on the stock.

The combined weight of Chesapeake’s remaining debt, negative free cash flow estimate for 2017 and lower production next year may just be a burden that many investors don’t want to carry for another year or more, and that is what depressed the stock on Friday.

Shares closed down 3.3% at $6.68 on Friday, in a 52-week trading range of $1.50 to $8.15. The consensus 12-month price target is $6.48 and may not include these recent changes.