Natural gas and upstream giant Chesapeake Energy Corporation (NYSE:CHK) continues to frustrate investors. And it hasn’t helped that when it comes CHK stock, even Wall Street analysts aren’t on the same page with respect to the timing of their calls.
CHK stock closed Wednesday at $5.49, down 2.3% on the week. The shares have fallen some 20% year to date, trailing not only the 5.5% rise in the S&P 500 index and the 10.6% decline in the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE). Aside from falling oil prices, which reached $47 per barrel last week, CHK stock has gotten burned from the company’s high debt level, which is at some $9.5 billion.
Arriving Late to the CHK Stock Bear Party
Last week, Merrill Lynch downgraded Chesapeake to “Underperform” from “Neutral,” which is not a surprise. The call by Merrill Lynch was seen as part of the sector rotation, during which the rating of some prominent names such as Exxon Mobil Corporation (NYSE:XOM) and ConocoPhillips (NYSE:COP) were also changed. But here’s the thing: In the case of Chesapeake, the brokerage giant lowered its price target to $8 from $10.
Now, if you’ve ever wondered when an analyst downgrade is not really a downgrade — if the lowered price target assumes more than a 40% premium to the stock’s current price, it’s tough to consider that call a bearish one. In this case, the lowered price target calls for a 42% premium above Chesapeake’s closing price on Friday. Doug Leggate, the analyst who made the call had this to say:
“We rate Chesapeake as Underperform due to the unfavorable impact of a slower oil recovery. While the company has made significant strides in reducing costs and improving its balance sheet, the company is highly leveraged at weak oil and gas prices. … Our price objective of $8 is based on a five-year outlook which assumes a mid-cycle 5.5 times its DACF multiple and a commodity deck of $68.00 WTI / $3.25 HH. The multiple is based on a finite timeline to delivery, which is supported by core NAV.”