Chesapeake Energy Corp. (CHK): Flat debt, bullish LT gas view needed to reverse underperformance - Goldman Sachs - 11/08/07
What's changed
CHK reported EPS of $0.69 versus First Call consensus of $0.60 and our $0.66. Total production was 2,026 MMcfe/d versus our 1,978 MMcfe/d estimate. Operating cash flow was $1,085 million versus our $1,051 million estimate.
Implications
The underperformance in Chesapeake shares over the past three months indicates to us that the Street is skeptical that Chesapeake’s asset sale monetization strategy will be seen through and lead to a step-change increase in returns that justifies a higher multiple. Part of this is for good reason – since Chesapeake unveiled its drilling versus acquisition strategy in August 2006, the company has done more than $3.5 billion in acquisitions, and debt levels are higher by about $3 billion versus 3Q 2006. Announcement of the company’s first asset sale – in Appalachia – is expected to be perceived positively, though there is likely going to be continued noise around accounting and the true amount of production growth. We believe it will ultimately take quarterly results that show in line or better than expected cash flow without a major increase in debt for Chesapeake to be afforded more credit and a higher multiple.
Valuation
Chesapeake shares trade at 5.3x 2008 EV/debt-adjusted cash flow, versus 5.6x for EOG Resources, 5.5x for Apache, 5.8x for Anadarko Petroleum, 7.1x for XTO Energy and 7.5x for EnCana. We see 15% upside to a $46 12-month discounted cash flow based target price versus 16% for other E&Ps. We continue to rate Chesapeake Neutral relative to an Attractive coverage view.
Key risks
Commodity price volatility, drilling results and cost pressures are the key risks to our target price. |
