FBR Initiates Chesapeake Energy Shares At Underperform

Chesapeake Energy Corporation’s CHK debt and transportation commitments have resulted in a hole that “appears too deep to dig out of,” FBR’s Joseph Allman said in a report. He initiated coverage of the company with an Underperform rating and a price target of $5.

Management Efforts

Management has made impressive efforts to improve the balance sheet by reducing debt, asset sales, cost cutting initiatives and improving operations. Analyst Allman mentioned, however, that Chesapeake’s balance sheet would likely continue to be stretched.

Cumbersome Debt Maturities

The company would require massive asset sales to meet its debt maturities. Allman estimated that Chesapeake would need to sell more than $7 billion in assets between 2017 and yearend 2020 to meet its obligations and have even a modest amount of liquidity. He added that this would be an enormous task, which the company is unlikely to achieve.

Overvalued Equity

“Using NYMEX futures prices (LT oil at $54 and gas at $3.11), we value the equity at $0. Based on our model, the assets have value on their own, but the debt and the transportation commitments more than offset the value of the equity,” the analyst commented.

Thus, the equity is highly overvalued at present, in view of Chesapeake's financial condition, which is unlikely to improve soon.

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