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Chesapeake (CHK) Falls 16.2% Year to Date: What's Ahead?

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Chesapeake Energy Corporation’s shares have declined 16.2% on a year-to-date basis. In comparison, the industry it belongs to fell only 0.2% during the said period.

The overall Zacks Oil-Energy sector jumped 5.5% and the S&P 500 Index was up 13.9% in the year-to-date period.

Let’s take a look at the factors that are substantiating its Zacks Rank #4 (Sell).

Gloomy Natural Gas Price Estimates

A huge portion of Chesapeake’s volume mix consists of natural gas. In first-quarter 2019, 68.2% of the company’s net production was natural gas, which is currently facing a tough market environment. Per U.S. Energy Information Administration (EIA), Henry Hub natural gas spot price is expected to be $2.77/MMBtu in 2019, indicating a 13.7% decrease from 2018 levels. This will likely result in a decline in the company’s profit levels. Natural gas prices for 2020 are expected to stay flat with this year’s projection. Hence, things are not expected to improve anytime soon.

Declining Output

The company’s 2018 production was recorded at 521,000 barrels of oil equivalent per day (Boe/d), lower than the 2017 level of 548,000 Boe/d. It issued its production guidance for 2019 in the range of 475,000-505,000 Boe/d. With natural gas prices expected to remain low, decline in output will certainly result in lower earnings.

Rising Expenses

Chesapeake’sproduction expenses in 2018 were recorded at $2.84 per Boe compared with $2.81 in 2017. Production expenses for 2019 are expected in the range of $3.25-$3.50 per Boe. Also, Chesapeake projects drilling and completion costs through 2019 within $2,050-$2,250 million compared with $2,086 million in 2018. The higher end of the projected range reflects a significant increase in drilling and completion costs in 2019. The higher expenses will put a dent in the company’s bottom line in the future.

Overvalued Stock

In terms of EV/EBITDA ratio, which is one of the best multiples for valuing oil and gas-related companies because energy firms have a large amount of debt and EV (Enterprise Value) including debt for valuing a company or industry, Chesapeakeseems Overvalued. The company currently has a trailing 12-month EV/EBITDA ratio of 7.3, which is above the broader industry’s 6.9.

Given these headwinds, Chesapeakeseems like a risky bet that ordinary investors should avoid.

Key Picks

Some better-ranked players in the energy space are Berry Petroleum Corporation (BRY - Free Report) , TOTAL S.A. (TOT - Free Report) and Apache Corporation (APA - Free Report) . While Berry Petroleum sports a Zacks Rank #1 (Strong Buy), TOTAL and Apache hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.  

Berry Petroleum’s earnings growth is projected at 23.8% through 2019.

TOTAL’s earnings growth is projected at 6.9% through 2019.

Apache surpassed earnings estimates in each of the trailing four quarters, with the average being 31.1%.

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