Chesapeake Energy Corporation (CHK) Still Not A Good Investment

Chesapeake Energy Corporation (NYSE:CHK) continues to execute its 25/25 plan, which includes setting a 2-year production target of 25% and debt reduction of 25%. We believe the energy company still has near-term pressures that will lead to uncertainty for the stock. Earlier this year, famed corporate raider Carl Icahn took a large stake in an effort to realign asset utilization and help the company reposition its debt (check out Carl Icahn’s big bets).

Chesapeake’s high debt levels – a result of aggressive CapEx – have strained the company’s operations. Concerns of late have been related to Chesapeake’s ability to fund CapEx, but more so, being able to meet debt obligations. 3Q balance sheet debt came in at $16 billion, which was a debt to capital ratio of nearly 50%.

Boding well for Chesapeake is its transition toward a more liquid-rich portfolio, expected to increase its liquid mix to 25% in 2013, from 19% in 3Q 2012. Although this is a positive, we still see earnings pressure as these changes occur.

As can be expected, then, Chesapeake has been looking to reduce its debt and CapEx, including cutting its gas rigs to 9, compared to 75 in 2011. Drilling CapEx is still expected to come in upwards of $8.5 billion in 2012, well above current cash flow. This shortfall led Chesapeake to take a $4 billion loan, while targeting asset sales of $14 billion by the end of this year.

From a valuation standpoint, Chesapeake trades well below most of its peers, and rightfully so. The energy company’s cost structure has forced its EBITDA margin to industry lows at 7% and as a result, its P/E is a lowly 13x. This valuation does not make the energy company a solid investment, though, given its industry-low long-term expected EPS growth rate of only 6%.

Are there better investments in this space?