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

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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.

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

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.

Looking Ahead for Chesapeake Energy

As was noted above, it’s critical to bear in mind that Chesapeake Energy needs time to reconfigure itself for maximum output and minimum input, even though giving a company time isn’t the market’s strong suit.

As they say, Rome wasn’t built in a day. Chesapeake CEO Robert Lawler shouldn’t — and shouldn’t want to — rush the cost cutting just to meet an arbitrary deadline. It’s better to do it right than do it fast.

At the same time, though it has happened without too much fanfare, oil prices are more than 60% above their early-2016 low. Although the rebound has temporarily stagnated, with the U.S. dollar still under pressure after moving into breakdown mode and with the nation’s crude stockpile finally starting to fall in earnest, oil prices should edge higher (though not dramatically so) in the foreseeable future.

Natural gas prices could admittedly use some help, though if nothing else, they’re steady.

Sometimes that stability/predictability is enough to allow a company to continue its rebuilding effort without constantly being forced to rewrite those plans on the fly, in response to massive swings in their pricing power. That’s where Chesapeake Energy is now … looking at a reasonably healthy future, but needing some more time to get there.

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


Article printed from InvestorPlace Media, https://investorplace.com/2017/08/chesapeake-energy-corporation-chk-stock-buy-patient/.

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