Chesapeake Is An 'Expiring Option' On The Commodity Price Rebound, Warns Bernstein

• Chesapeake Energy Corporation CHK shares have been treading a downward path in 2015 and are down 62 percent year-to-date.
• Bernstein’s Bob Brackett downgraded the rating on the company from Outperform to Market Perform, while reducing the price target from $18 to $9.
• Chesapeake’s valuation is expected to be determined by the company’s ability to generate near-term cash flows and the value of its assets, Brackett stated.

Analyst Bob Brackett mentioned that although both oil and gas prices are expected to recover in the future, the timing of such a recovery is not certain. He views the $2 price level for natural gas as a strong support level, since several producers including Chesapeake had announced voluntary curtailment of production at this level.

The 3Q earnings releases by several companies indicated that even low cost operators are not profitable at the current price level. Chesapeake’s high cost structure will make it difficult to generate cash.

Brackett added that the expected 30-40 percent decline in asset sale pricing will have negative implications for Chesapeake and it will be forced to sell assets at a discount. He added that the company’s renegotiated gathering agreement with Williams for trading higher volumes at lower price will help on the margin front, but constrain capital flexibility.

“We think there is a risk that in an extended pricing slump, CHK will be forced to sell assets at low- or mid-cycle prices. Thus we believe the market should consider the value of CHK's assets along with its ability to generate near-term cash flow,” the Bernstein report stated.