Surprise, Surprise… Bank Of America Cuts Chesapeake's PT

Shares of Chesapeake Energy Corporation CHK were up Thursday despite Bank of America's reduction in its price target.

The firm cut its price target from $17 to $9 following the company’s update of the production outlook (and debt structure) laid out in its latest presentation. “In a nutshell, CHK’s cashflow multiple is overwhelmed by absolute leverage and more hefty realization discounts inherited from prior management's strategy that passed significant value to a former midstream subsidiary."

While the analysts believe CEO Doug Lawler has "taken steps to reposition Chesapeake operationally and from the standpoint of reduced organizational complexity," their base case is that a recovery in oil prices still leaves the company's multiple elevated for an extended period.

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While high profile shareholders have recently upped their bets, the firm views this as “more about averaging down existing high cost positions on a directional view of the commodity than any fundamental improvement in CHK’s outlook.”

Bank of America expects EPS of ($0.25) for 2015, $0.10 for 2016, and $0.69 for 2017. All estimates are well below consensus of $0.15, $0.28 and $0.83, respectively.

Under the base case that assumes a recovery in oil and gas prices to approximately $70 WTI and $4.00 gas by 2018, the analysts estimate Chesapeake’s cashflow at roughly $3.5 billion. At an average mid-cycle multiple of 6x, the implied EV of $21 billion net of substantial debt and equivalents leads to an implied equity value of just $6 billion and associated price target of about $9.