Chesapeake Energy Trading At A Discount To Its Peers, But For Good Reason

Chesapeake Energy Corporation CHK shares are up more than 200 percent from their February lows as the company has made a number of changes to combat the lingering depressed commodity market. While he applauds Chesapeake for its improvements, Argus analysts David Coleman believes the company’s debt and weak cash flow will likely continue to weigh on its valuation.

Argus projects that Chesapeake will return to modest profitability in 2017, but traditional valuation metrics that rely on earnings are useless in the meantime.

“On more relevant industry-specific measures, the stock trades at a discount to peers based on price/cash flow, enterprise value/EBITDA, enterprise value/total reserves and enterprise value/daily production,” Coleman explains.

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Despite eliminating the dividend, selling non-core assets and dramatically cutting capex, Coleman believes that the road ahead will not be easy for Chesapeake or its shareholders.

Chesapeake has cut its debt by $1 billion so far in 2016, but its remaining $9.6 billion in debt remains troubling.

Following the recent OPEC production cut deal, Argus now recommends investors allocate between 6 and 8 percent of their diversified portfolios in the Energy Sector.

Argus maintains a Hold rating on Chesapeake. The firm is projecting 2016 EPS of $(0.26) and 2017 EPS of $0.82.