Credit Suisse Downgrades Chesapeake, Sees Little Upside Considering Company May 'Choose To Protect The Balance Sheet'

In a new report Wednesday, Credit Suisse analyst Mark Lear upgraded the slumping oil & gas exploration & production (E&P) sector to Overweight and initiated positive coverage on several names in the space.

While the majority of E&P investors are cheering the bullish call, shareholders of Chesapeake Energy Corporation CHK were disappointed to learn that Lear names Chesapeake his one bearish exception. In the report, he detailed the reasons why Chesapeake was Credit Suisse’s lone E&P downgrade.

Limited Upside

According to Lear, Chesapeake’s current situation leaves very little room for optimism. The company has aggressively scaled back its rig count and its current plans for 2016 production paint a picture of relatively weak output and cash flow. Following an outsized Q1 spend, Lear believes that Chesapeake will be extremely tight with spending in coming quarters, and Credit Suisse sees little upside for the company’s net asset value (NAV).

Defense will continue to be the name of the game for Chesapeake, and Lear believes that the company’s focus will be centered on protecting its balance sheet rather than increasing its production and/or expanding its holdings.

Weak Assets

In an environment where operational efficiency has become critical, Lear sees Chesapeake’s asset base as sub-par. In such a weak oil & gas price environment, Lear finds it hard to make a case for investing in Chesapeake’s properties.

“We think investors should look elsewhere for investment in this environment and consider operators with core exposure and more flexible balance sheets that are capable of accelerating NAV even at the strip,” he concluded.

The Call

Although Lear sees no reason to buy Chesapeake at the moment, he notes that the stock's severely depressed share price has left minimal downside from current levels. Credit Suisse drops Chesapeake’s rating from Outperform to Neutral and lowers its target price from $20 to $13.