Fundamental Analysis: Chesapeake Energy Corp. (NYSE:CHK)

CHK-US’s annualized rate of change in capital of -3.5% over the past three years is less than its peer median of 10.9%. This below median investment level has also generated a less than peer median return on capital of -2.7% averaged over the same three years. This outcome suggests that the company has invested capital relatively poorly and now may be in maintenance mode.

With debt at 27.5% of its enterprise value compared to an overall benchmark of 25% (Note: The peer median is currently 17.7%), and relatively tight interest coverage level of 0.5x, CHK-US would have a hard time raising much additional debt. All 9 peers for the company have an outstanding debt balance.

CHK-US’s interest coverage is its lowest relative to the last five years and compares to a high of 141.5x in 2010. The decrease in its interest coverage to 0.5x from 1.8x (in 2011) was also accompanied by a decrease in its peer median during this period to 3.4x from 5.5x. Interest coverage rose 0.8 points relative to peers. It is also below the 2.5x coverage benchmark unlike the peer median.

CHK-US’s debt-EV has increased 6.8 percentage points from last year’s low and is now above its five-year average debt-EV of 25.0. While its debt-EV increased to 27.5% from 20.7% (in 2011), its peer median decreased during this period to 17.7% from 18.4%. Relative to peers, debt-EV rose 7.5 percentage points. Unlike the peer median, it is also above the 25% leverage benchmark.

Chesapeake Energy Corp. (NYSE:CHK) explores, develops and produces oil and natural gas properties. Its principal activities include discovering and developing unconventional natural gas and oil fields onshore in the U.S. The company has also vertically integrated its operations and owns substantial marketing, midstream and oilfield services businesses directly and indirectly through its subsidiaries Chesapeake Energy Marketing, Inc., Chesapeake Midstream Development LP, Chesapeake Oilfield Services LLC, and Chesapeake Midstream Partners LP. Chesapeake Energy operates its business though the following segments: Exploration and Production; Natural Gas and Oil Marketing; Gathering and Compression; and Oilfield Services. The Exploration and Production segment is responsible for finding and producing natural gas and oil. The Marketing, Gathering and Compression segment is responsible for marketing, gathering and compression of natural gas and oil primarily from Chesapeake-operated wells. The Oilfield Services segment is responsible for contract drilling, oilfield trucking, oilfield rental, pressure pumping and other oilfield services operations for both Chesapeake-operated wells and wells operated by third parties. The company was founded by Aubrey K. McClendon and Tom L. Ward on May 18, 1989 and is headquartered in Oklahoma City, OK.

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