CHK vs. DVN Stock: The Competition Isn’t Even Close

by Aaron Levitt | March 3, 2014 8:55 am

At one time, both Devon Energy (DVN[1]) and Chesapeake (CHK[2]) were the reigning kings of natural gas stocks. The duo were the hottest ticket for investors as the two natural gas stocks fracked their way into America’s various shale formations and unearthed a ton of energy.

dvn-stock-chk-stockUnfortunately, they fracked a bit too hard.

As both DVN and CHK stock drilled, an interesting thing happened. A relatively warm winter one year, coupled with rising supplies of natural gas, pushed prices for the fuel into the toilet. Earnings plunged for CHK and DVN stock, as did their share prices. Devon and Chesapeake spent much of the time since digging out of the mess they made.

Well, what a difference a few years makes. Natural gas prices are once again at new highs, and things are beginning to look up for the natural gas sector. That makes both DVN and CHK stock interesting values in the new year.

However, the question remains: Is DVN or CHK the better natural gas stock? With that in mind, let’s take a look at what each of these fracking superstars has to offer — and whether CHK or DVN stock steals the natural gas stock crown.

DVN Stock — Devon Is Making The Right Moves

After the recent fall in natural gas prices, DVN realized that it needed to change … fast.

The key for DVN stock is that the firm isn’t really just about natural gas anymore. The name of the game is now more about liquids and shale oil production[3]. And that new focus is providing the real catalyst for Devon’s future gains.

DVN stock has been aggressively shedding non-core assets while increasing its holdings in some of the biggest and most promising oil fields in the U.S. This includes by $6 billion worth of Eagle Ford exposure from privately held GeoSouthern last year. More recently, DVN sold nearly $3 billion worth of Canadian natural gas fields to Canadian Natural Resources (CNQ[4]).

This emphasis on shale oil and natural gas liquids has been working. DVN now receives about 44% of its total production from liquids, versus only about 39% this time last year. And that’s a good thing for DVN stock.

That increase in production is driving cash flows an earnings for DVN stock. For the fourth quarter[5], DVN stock reported a 26% pop in operating cash flows, and margins per barrel of oil equivalent (BOE) rose 15%.

Add its recent plans to merge its pipeline and gathering assets into MLP Crosstex Energy LP (XTEX[6]), and DVN stock seems to have gotten its mojo back.

CHK Stock — Chesapeake Is Still Struggling

The problem with CHK has been its huge debt load.

In an effort to expand the company’s portfolio of gas fields and unconventional assets, Chesapeake CEO Aubrey McClendon outspent cash flows for 19 of the 20 years he was in charge. That wasn’t so much a problem when natural gas was at $15 per MMBtu. Unfortunately, during the fall in prices, that debt ballooned out of control and forced the company to put the “For Sale” on a number of prized properties and assets. Those sales included some pretty core and cash-flow-heavy fields.

Even after McClendon’s ouster, the assets sales at CHK have continued and have now reached “the kitchen sink” in terms of what’s going.

CHK just announced that it is considering selling[7] or spinning off its oil field services unit to raise money. The business’s only assets are 115 conventional-style land drilling rigs and nine hydraulic fracturing rigs. The kicker is that most of these rigs are actually leased and not fully owned. Many analysts don’t expect CHK stock to see really any monetary gains from selling the oil service unit.

To that end, CHK has decided to continue selling its profitable midstream portfolio[8]. Chesapeake will unload its natural gas compression assets for $520 million to Access Midstream Partners (ACMP[9]) — a former subsidiary of CHK that was sold off — and Exterran Partners (EXLP[10]).

While these asset sales have helped its cash flow issues, they haven’t helped on the production front. CHK expects its shale oil output to grow by just 1% this year. Meanwhile, overall natural gas production will fall 2%.

DVN vs. CHK Stock: And the Winner Is…

In the fight for the best natural gas stock, the verdict isn’t even close. It has to be Devon. Unlike CHK, DVN seems to be making all the right moves with regards to growing its core-asset base and increasing production. Chesapeake on the other hand, is still fighting the ghosts of McClendon.

And with CHK stock up about 35% in 2013, investors were expecting that the turnaround story would finally be playing out. But with more asset sales and terrible production growth ahead, they’re going to be disappointed. The poor production numbers caused CHK stock to drop by about 4%.

Meanwhile, DVN stock hasn’t jumped as much during 2013, and it’s both profitable and dirt cheap. DVN stock trades at a forward P/E of less than 10.

The choice is pretty clear for portfolios. For investors looking at the former natural gas stock kingpins, DVN stock takes the investment crown.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

  1. DVN:
  2. CHK:
  3. liquids and shale oil production:
  4. CNQ:
  5. For the fourth quarter:
  6. XTEX:
  7. considering selling:
  8. profitable midstream portfolio:
  9. ACMP:
  10. EXLP:

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