Why This Chesapeake Energy Analyst Is Bullish: ESG, Buybacks And More

Zinger Key Points
  • As Chesapeake grows its natural gas segment, this analyst says it is expecting it to increase cash returns for shareholders.
  • Share buybacks are additive to Chesapeake’s formula, says Credit Suisse's William Janela.
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Due to Chesapeake Energy CHK restructuring to lower its costs, it will be focusing on bolstering its balance sheet, as it is a legacy company, a Credit Suisse analyst said Tuesday.

With Chesapeake's recent acquisitions of Chief E&D Holdings and Vine Energy, it will be able to lower its costs and produce more natural gas, the bullish analyst said.

In addition, Kimmeridge has initiated a stake in Chesapeake as a prominent oil and gas sector activist, with plans to boost shareholder value. 

The Credit Suisse Analyst: William Janela initiated coverage of Chesapeake Energy with an Outperform rating and $115 price target.

The Chesapeake Energy Takeaways: Chesapeake is fundamentally strong when compared to its peers and aggressively restructuring to bolster its exploration and production business, Janela said in a Tuesday initiation note.

It appears the company’s shares have been trading at a discount when compared to peers, the analyst said.

As Chesapeake is transitioning to increasing its natural gas segment, it is expecting it to increase cash returns for shareholders, he said.

“At current strip prices, we see CHK generating ~$5B of organic FCF and returning >$2.5B in total dividends in 2023, >20% cash return yield.” 

Share buybacks are additive to Chesapeake’s formula, Janela said.

“We forecast Chesapeake will execute the $1B authorization by YE23, boosting its total cash return yield to >25%,” the analyst said, adding that this is much higher than Chesapeake’s E&P peers’ cash returns of 12%.

Additionally, it appears that Kimmeridge is directing Chesapeake to focus on divesting from the Eagle Ford basin, estimating its assets value to be north of $4 billion, he said.

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Yet Chesapeake is striving to initiate disposals before the end of 2022, Janela said.

“Disposals would reduce Chesapeake's cash unit cost by >20% and provide substantial room to accelerate buybacks.”

This positions Chesapeake more positively toward ESG when compared to its E&P peers, as they are operating in the two largest basins in the United States, the analyst said. 

CHK Price Action: Chesapeake Energy shares lost 6.13% in Tuesday's session, closing at $87.65, according to Benzinga Pro. 

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Posted In: Analyst ColorPrice TargetInitiationAnalyst RatingsCredit SuisseWilliam Janela

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