Tuesday, June 21, 2011

A Look At Chesapeake Energy

Energy companies have a favorite of investors over the past few years. Crude oil prices have risen in recent months due to political instability in the Middle Eastern region. Energy investors have benefited from this boom as crude oil has crossed the $100 threshold many times. Not all sectors of the energy complex have taken. Natural gas prices have remained depressed over the past few years.

The low prices for natural gas have hit Chesapeake Energy (CHK) especially hard. Chesapeake Energy is the second largest natural gas producer in the United States. Chesapeake has nearly 3 billion feet of natural gas. The company owns 14.3 million acres of land. Chesapeake performs well in an environment of rising natural gas prices and poorly when prices are depressed. Natural gas accounts for 87% of the company’s production efforts as a whole.

Chesapeake has been a relatively consistent slow grower whose performance is one of the best in the industry. The stock however has not been an outperformer as the company has suffered under some poor management decisions. The chief executive officer was the subject of a margin call 2 years ago that led to a massive selloff in the stock. Chesapeake is hoping top unlock value for shareholders.

So, how does the stock look? Chesapeake trades at 9 times earnings. The stock trades at 1.5 times book value and 2 times sales. The stock currently sells for 0.8 times earnings growth. Chesapeake has been hampered by its massive debt burden of nearly $10 billion dollars. The company has been making a concerted effort to lower its debt level over the past year. Management plans to trim the outstanding debt by 25%.

The company recently raised its dividend 17% to 35 cents per share. The one cent quarterly increase seems to be a response to the cries of shareholder asking for a dividend boost. Chesapeake Energy had not raised its dividend in almost four years. The company is finally releasing some of its cash to shareholders who have been waiting for the natural gas stock to bounce back. The company is still not a great dividend play with a 1% yield but the increasei is a move in the right direction.


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