Must-know: Why Chesapeake’s debt could be holding its price back

Market Realist

A key overview of Chesapeake and its second quarter 2014 earnings (Part 8 of 8)

(Continued from Part 7)

Size

Chesapeake’s (CHK) closest peers in terms of market size include Devon Energy (DVN), Pioneer Natural Resources (PXD), and Marathon Oil Corp (MRO).

Devon Energy is the largest company here when measured by enterprise value (or EV) as well as market capitalization. DVN’s EV is $46 billion, while its market cap is $30.8 billion.

Production

Among its peers, CHK has the highest production at 694,650 BOE/D. It’s closely followed by DVN at 667,000 BOE/D. PXD had the smallest production, at 183,000 BOE/D.

Price-to-earnings ratio

PXD has the highest price-to-earnings ratio among its peers. An unusually high P/E might mean that PXD is likely to have had an extraordinary loss during the period of measurement (trailing 12 months) that still allowed for a positive P/E calculation.

Indeed, PXD’s profits fell to $1 million in the second quarter. This was far below the $337 million profit it made in the corresponding period a year ago.

CHK’s P/E ratio, however, is the lowest in the lot. This represents the market’s relative lack of confidence in its future growth prospects. It could also indicate its current relative cheapness.

EV/EBITDA and debt-to-equity

EV to earnings before interest, taxes, depreciation, and amortization (or EBITDA) is the lowest for MRO, closely followed by CHK. This shows the cheapness of both companies compared to peers.

Plus, you should note that EV also includes the amount of net debt a company carries. As the graph above notes, when scaled in terms of EBITDA, CHK has one of the higher debt levels. A higher net debt/EBITDA might result in a lower investment grade for a company.

CHK’s huge debt levels also reflect through its debt-to-equity ratio, which is the highest among the group. This is likely why markets consider CHK risky, explaining its relative cheapness.

Returns and dividends

In terms of profitability, CHK has the lowest return on equity (or ROE), at 4%. MRO has the highest, at 13.5%. CHK also has the lowest profit margin in the group, at 3.6%, while MRO has the highest profit margin, at 19.9%. See parts 4 and 5 of this series to learn why CHK’s profitability has come under pressure lately.

Returns to shareholders in the form of dividends, however, are 1.31% for CHK. This is the second highest dividend in the group, after MRO.

Chesapeake recently paid approximately $1.26 billion to repurchase preferred shares of CHK Utica, a subsidiary company. The buyback eliminated approximately $75 million in annual dividend payments—usually a cash drain for a company.

Key exchange-traded funds (or ETFs)

CHK, PXD, MRO, and DVN are all components of the Energy Select Sector SPDR ETF (XLE).

Market Realist has also published peer analysis for ConocoPhillips. Refer to our series Must-know: Key takeaways from ConocoPhillips’ Q2 earnings.

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