Is Chesapeake Energy Corporation (CHK) Regaining Our Confidence?

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Chesapeake Energy (CHK)Chesapeake Energy Corporation (NYSE:CHK) came a long way during 2012. Its cash flow problem that led the company to take a $4 billion loan resulted in a rise in the company’s probability of default; it also raised investors’ concerns regarding the future prospects of the company. Since then, however, the company was able to sell many of its assets, make changes in management, and repay part of its loan. Is the company out of the woods? Was 2012 such a bad year for this oil and gas company? And what could we learn about the future progress of this company?

The big issue will remain the company’s debt problem. The company decided back in November to roll over its previous loans with a $2 billion loan for a five year time-frame. The company is still selling assets in order to pay back its debt. As of December, Chesapeake Energy Corporation (NYSE:CHK) sold the rest of a majority of its remaining midstream assets for nearly $2.16 billion. This sale will put the company one step closer to cut its debt and lower its financial risk.

The company also made changes in management: The current CEO will retire from his position by April 1. This move might also regain the confidence Chesapeake’s investors. So now let’s turn to the see how the company did during 2012.

Despite the low expectations Chesapeake was able to pull out of 2012 with some positive results. The company’s operating profit resulted in a loss of $1.9 billion. But this loss is misleading: it includes nearly $3.6 billion of goodwill provision due to impairment of natural gas and oil assets, which was, among other reasons, due to the tumbling of natural gas prices during the year.

After controlling for this provision, the company’s operating profitability was still lower in 2012 compared to 2011: the profit margin declined from 19.9% in 2011 to 13.8% in 2012. In comparison, during 2012 the profitability of other leading oil and gas companies such as Chevron Corporation (NYSE:CVX) or Royal Dutch Shell plc (ADR)(NYSE:RDS.A) slightly changed compared to 2011: The  profit margin of Chevron inched up from 18.8% in 2011 to 19.2% in 2012; the profitability of Shell declined from 10.9% to 9.9% in 2012.

Chesapeake’s adjusted (for unusual expenses) operating profitability was in the middle of the pack during 2012 at 13.8% – a drop of nearly 6 percentage points compared to 2011. Part of the drop could be due to the tumble in natural gas prices: in 2012, the price of natural gas fell to a yearly average of $2.83/mmbtu – a 30% drop in price compared to 2011. This could suggest that the low prices of natural gas may have adversely affected Chesapeake.Furthermore, other companies were less affected by the sharp fall in the price of natural gas.


In terms of growth in sales, Chesapeake has outperformed other oil and gas companies: in 2012, the company’s growth in revenues was 5.85%. As a comparison, during 2012, Shell’s revenues inched down by 0.64%; Chevron’s revenues declined by 4.65%.

Conversely, Chesapeake wasn’t able to provide a reasonable dividend compared to its peers. The company only offers an annual yield of 1.8%. Shell pays an annual yield of 5.3% and Chevron offers a yearly yield of 2.6%. When examining the payout of these companies (the dividend payment/earnings per share) Shell is leading with nearly 40% payout. Chevron has a 26% payout, and Chesapeake, even after adjusting its EPS for the goodwill provision, has a payout of only 16%. This means, Chesapeake isn’t paying much of its earnings. This is reasonable considering the company’s shaky situation in recent years.

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