Chesapeake Energy Corporation (NYSE:CHK) is not having the smoothest post-earnings reaction. CHK stock is up 5% today on a rebound in oil prices, but only after they tanked more than 7% Thursday following the company’s first-quarter report.
It’s a painful reminder about the volatility of earnings season.
Chesapeake earned 23 cents per share in the most recent quarter, topping analysts’ estimates of 19 cents per share. Revenues grew 41% year-over-year to $2.75 billion, decidedly beating estimates of $2.32 billion.
Further, Q1 oil production came in ahead of Chesapeake’s midpoint guidance, and management expects “significant” growth in the second half of 2017.
Finally, CHK reduced its debt by 9% to $9.1 billion from $10 billion last quarter.
So … why the selloff?
While production may have come in ahead of management’s midpoint guidance, it fell short of analysts’ expectations. Its 528,000 boe/day came up short of the 530,000 to 536,000 boe/day in analysts’ forecast. Capex also came in higher than expected.
Another driver? Oil. Crude oil prices were down by more than 4% on Thursday and hit its lowest levels in months. That has contributed to quite the breakdown in CHK stock.
Dealing With Chesapeake
It’s not a coincidence that oil prices and CHK stock have been trading in lockstep for the past month. Shares are highly correlated to the commodity, and lower prices don’t do Chesapeake any favors.
Last month, we said it would be ideal if investors could buy the stock around $5.75. With CHK stock hovering in the mid-$5s though, that suggestion was admittedly too early.
At the time, we also suggested a stop-loss of $4.75, which is still in play today. That figure is just below the March low, where CHK quickly bounced from and raced higher, climbing to over $6 one month later.
Can it repeat?
It’s hard to say, and impossible to predict. Chesapeake Energy stock is now below all three major moving averages, and it’s hovering just above $5 per share.
Bullish investors can justify buying the stock and maintaining a $4.75 stop-loss. Should shares fall below that level, though, a drop to its 52-week low of $3.56 is technically on the table.
Bottom Line for CHK Stock
Thursday was a grim day for Chesapeake shareholders, but Friday’s rebound of about 5% shows what can happen if oil prices bottom and rebound higher.
While there were some disappointments in the quarter, positive earnings, strong revenue growth and a decline in debt is encouraging to see. It also helps that Chesapeake is hedging. Management said roughly 68% of its remaining oil projection is hedged at $50.25 per barrel — notably above current prices. For the remaining 75% of its gas production, CHK has a hedge at $3.05 per mcf.
If — and this is a big if — Chesapeake can generate earnings of 76 cents per share this year, CHK stock will trade at an attractive 6.6x 2017 earnings. Analysts are also looking for $1.12 in earnings in 2018, meaning it trades at less than 4.4x 2018 earnings estimates. There’s no guarantee CHK can achieve those numbers, but Q1 was a step in the right direction.
For less volatile plays, however, investors could also consider stocks like Exxon Mobil Corporation (NYSE:XOM) or Chevron Corporation (NYSE:CVX).
Bret Kenwell is the manager and author of Future Blue Chips. He’s on Twitter at @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
