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FINANCIALS

Chesapeake Energy Corporation (CHK) Shares Have Over 11% Downside, Says Analyst

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UBS has updated its thesis and estimates on Chesapeake, after the company’s second quarter earnings release last week

UBS analyst William Featherston raised his price target on Chesapeake Energy Corporation (NYSE:CHK) from $4 to $4.25 today, a week after the company released its second quarter of fiscal year 2016 earnings. The analyst’s raised price target still reflects 11.46% downside potential for the shares based on their last close.

For the second quarter, Chesapeake posted $1.6 billion in sales, missing the consensus of $2 billion and reflecting 46.67% year-on-year decline in revenue. For its bottom line, the company posted a loss of 14 cents per share, missing the 11-cent per share loss the Street had forecasted.

The analyst pointed out that the company raised its production guidance for 2016 from 625-650 Million Barrels of Oil Equivalents per Day (MBOED) to 611-638 MBOED. Chesapeake also issued a 532-562 MBOED production volume guidance for the beginning of 2017.

Mr. Featherston pointed out that the $3.88 billion company “agreed to convey its Barnet assets to First Reserve-backed Saddle Barnet Resources.” He further added that Chesapeake had also consented to halt its existing gathering deal with Williams Partners, and had also forecasted a shortfall in minimum volume commitment (MVC) payments. The company is also going to pay $66 million to Williams Partners to lower its “Mid-Continent cost-of-service gas gathering agreement to a fixed-fee arrangement, expected to reduce its Mid-Continent gas gathering cost by 36% starting 3Q16.” In all, the company owes $400 million to Williams Partners; in order to fund it, Chesapeake has sold “a long-term gas supply agreement with $4/MMBTU floor pricing for $146 million.” The analyst believes these agreements bring $500 million of NAV at a cost of $400 million, raising the company’s NAV by approximately $20 per share.

As per the data on FactSet Fundamentals, the Street has a predominantly Neutral stance on Chesapeake shares. Of the 34 analysts covering the stock, four maintain a Buy, one has an Overweight rating, 18 have a Hold, two analysts maintain an Underweight, while the remaining nine hold a Sell rating on the stock. The consensus also holds a mean 12-month price target of $4.90, reflecting 2.08% upside potential over the last close.

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