Chesapeake Energy Corporation Annual Valuation – 2015 $CHK

CHK_logoBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – December 2014.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Chesapeake Energy Corporation (CHK) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Chesapeake Energy Corporation (Chesapeake) is a natural gas and oil exploration and production company. The Company is a producer of natural gas and oil and natural gas liquids in the United States. Its operations are focused on discovering and developing its resource base of unconventional natural gas and oil assets onshore in the United States. The Company also owns substantial marketing and compression businesses. The Company operates in two segments: exploration and production, and marketing, gathering and compression. The exploration and production segment is responsible for finding and producing natural gas, oil and natural gas liquids (NGL). The marketing, gathering and compression segment is responsible for marketing, gathering and compression of natural gas, oil and NGL.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years - FAIL
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $19.66
MG Value $33.98
MG Opinion Undervalued
Value Based on 3% Growth $12.80
Value Based on 0% Growth $7.50
Market Implied Growth Rate 6.89%
Net Current Asset Value (NCAV) -$31.92
PEmg 22.27
Current Ratio 0.56
PB Ratio 0.80

Balance Sheet – September 2014

Current Assets $3,129,000,000
Current Liabilities $5,602,000,000
Total Debt $11,592,000,000
Total Assets $40,518,000,000
Intangible Assets $0
Total Liabilities $24,198,000,000
Outstanding Shares 660,000,000

Earnings Per Share

2014 (estimate) $1.51
2013 $0.73
2012 -$1.46
2011 $2.32
2010 $2.51
2009 -$9.57
2008 $0.93
2007 $2.62
2006 $4.35
2005 $2.51
2004 $1.53

Earnings Per Share – ModernGraham

2014 (estimate) $0.88
2013 $0.01
2012 -$0.58
2011 -$0.17
2010 -$0.89
2009 -$1.67

Dividend History

Conclusion:

Chesapeake Energy Corporation is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, lack of earnings stability or growth over the last ten years, as well as the poor PEmg ratio.  The Enterprising Investor is concerned with the level of debt relative to the net current assets and the lack of earnings stability over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from a loss of $0.89 in 2010 to an estimated gain of $0.88 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 6.89% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.

Be sure to check out previous ModernGraham valuations of Chesapeake Energy Corporation (CHK) for greater perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Avery Dennison (AVY)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Chesapeake Energy Corporation (CHK) at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.


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