Why This Chesapeake Energy Analyst Has A Zero Price Target

Chesapeake Energy Corporation CHK stock peaked in the middle of the Great Recession, with shares pressing $67. In the last decade, the Street has pulled back on the stock and let its value dwindle to nickels and dimes.

One analyst said Friday that even that valuation is too generous.

The Chesapeake Rating

MKM Partners analyst John Gerdes downgraded Chesapeake Energy from Neutral to Sell and cut the price target from $1 to zero. 

The Chesapeake Thesis

The downgrade is due largely to a negative read on internal operations, Gerdes said in the Friday downgrade note: "5%-10% higher capital intensity, approximately 2% lower oil production composition and the uncertainty as to the long term [viability] of the company’s capital structure." (See his track record here.)

The analyst said he expects capex to dwindle to $1 billion by 2024 as production falls by one-third and the ratio of net debt to earnings before interest, tax, depreciation and amortization (EBITDA) rises from 3.8 to 5.

"Assuming access to the current $3 billion of bank line credit capacity, which is doubtful once net debt exceeds 4x, Chesapeake could layer, if necessary, the approximately $1.14 billion of aggregate term debt due through 2023 though the funding of the $1.5 billion term loan due June 2024 is highly uncertain."

More than half of the company’s planned wells are expected to generate inferior returns, contributing to returns far below the industry median, according to 

CHK Price Action

The stock was trading 0.46% higher at 26 cents at the time of publication Friday. 

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Photo courtesy of Chesapeake Energy.