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Why Chesapeake Energy Corporation (CHK) Stock Is a Buy for the Patient

If you were hoping for a quick turnaround in CHK, you weren't being realistic

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Three months ago, yours truly here penned a mostly bullish (albeit cautious) look at Chesapeake Energy Corporation (NYSE:CHK). Although I was and still am concerned the turnaround effort will be a slugfest and could in turn make owning CHK stock something of a … shall we say “adventure”? So far, things have panned out pretty much as I expected.

Chesapeake Energy topped its prior quarter’s earnings estimates, though a contracted production plan spooked shareholders.

With that post-earnings response factored in, CHK stock is now down about 20% since that previous examination.

The $64,000 question: Am I still on board with the idea of a real turnaround from Chesapeake Energy?

In short, yes I am, though the same caveat from May needs to be reiterated. That is, these things take time, and that the near-term noise is ideally ignored.

CHK Stock: Not An Auspicious Start

Just as a refresher in case you don’t recall my comments from May [go here for the whole enchilada], Chesapeake Energy is culling costs and improving its efficiency. Like most other oil stocks, CHK stock was trashed in the wake of oil’s 2014 meltdown, but between crude’s partial recovery since its early-2016 low and the turnaround effort, there’s a respectable glimmer of hope for the gas and oil giant.

That would be a tough conclusion to come to given the response to last quarter’s results.

For its second quarter of the year, ending in June, CHK earned a profit of 18 cents per share on revenue of $2.28 billion. Both were a marked improvement on the Q2-2016 results, when the company only earned 8 cents per share on $1.622 billion in sales.

CHK stock initially jumped on the good news, rising as much as 4% in Thursday’s pre-market action, shortly after the results were unveiled. By the time that session’s closing bell rang, shares were extending a downtrend that got underway a few days prior. The concern? Its oil and gas production came up short of expectations. Specifically, the company only produced 528,000 barrels of oil (or equivalent) per day for its second quarter, versus the market’s expectations of 538,000.

Perhaps worse, the company’s production costs were $2.92 per barrel, rolling in considerably higher than some had forecasted. Raymond James analyst John Freeman, for instance, was only modeling production costs of $2.40 per barrel. The actual figure suggests Chesapeake Energy has yet to cut enough of its costs to satisfy investors, or itself.

Throw in the fact that the company plans on cutting four rigs before the end of the year and has also scaled back its 2017 plans for new well, it becomes even easier to assume Chesapeake just isn’t getting any traction.

And yet, CHK stock remains a name I can’t help but continue to like.

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Article printed from InvestorPlace Media,

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