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Chesapeake Energy Corporation (CHK), Exxon Mobil Corporation (XOM): Is This Gas Producer Regaining Investors’ Confidence?

Exxon Mobil Corporation (NYSE:XOM)’s drop in production of oil and natural gas reflected in its drop in earnings in both the upstream and downstream segments. If not for the sharp rise in chemical earnings by 62%, the company’s earnings would have plummeted. Looking forward, the company increased its capital and exploration expenditures by 34% and 38% in the upstream and downstream segments, respectively. This will help the company reach growth in sales in the years to follow.

Chesapeake
’s financial situation is improving

The company has also recently sold assets in the Northern Eagle Ford Shale and Haynesville Shale for nearly $1 billion, which brings it to $3.6 billion in asset sales. This will enable the company to increase its capital expenditure and pay off part of its loans. These steps have also helped regain the confidence of investors in the company.

Even though Chesapeake is making great strides towards improving its financial situation, the company still has a long way to go:  Its debt-to-equity ratio is still very high compared to other leading oil and gas companies: Chesapeake’s current ratio is 0.9; Exxon Mobil Corporation (NYSE:XOM)’s ratio is only 0.1.

Nonetheless, the sharp rise in Chesapeake’s stock price didn’t make the stock overpriced compared to the industry and other oil and gas companies.

In the table below, I have used Chesapeake and ExxonMobil’s enterprise value and their EV-to-EBITDA ratios.

As seen,
Chesapeake’s EV-to-EBITDA ratio is close to the industry average and to ExxonMobil’s price. These findings suggest, at face value, that Chesapeake’s stock price isn’t too high for the industry and other oil and gas companies.

The bottom line

I think Chesapeake is on the right course and the actions taken by its management are enabling the company to improve its financial situation and also keep its high capital expenditure towards new projects. I still think the company will need to further cut down its natural-gas operations and invest more in oil projects. Moreover, the recent rally didn’t put Chesapeake’s valuation above the industry’s average or the average of other oil and gas companies. Therefore, I think this company could be an interesting investment worth considering.


Lior Cohen has no position in any stocks mentioned. The Motley Fool has the following options: long January 2014 $20 calls on Chesapeake Energy, long January 2014 $30 calls on Chesapeake Energy, and short January 2014 $15 puts on Chesapeake Energy.
Lior is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Is This Gas Producer Regaining Investors’ Confidence? originally appeared on Fool.com is written by Lior Cohen .

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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