Chesapeake Energy Corporation (NYSE:CHK) Financial Analysis
United States of America’s second biggest natural gas producer and eleventh largest producer of liquids, Chesapeake Energy Corporation (NYSE:CHK) has never been considered as a company worth investing in. Starting with a meager $50,000 from its owners in 1989, Chesapeake Energy Corporation (NYSE:CHK) has grown to become one of the top gas and oil producers present in the United States. So why has Chesapeake Energy (NYSE:CHK) never realized its potential?
A deeper look into the financial performance of the company projects a solid growth for the next few years. However, the growth rate has slowed down in recent years as Chesapeake Energy (NYSE:CHK) has accumulated alot of debt, hence postponing its plan to become a global empire. It went on to produce 695 thousand barrels per day which puts it behind two other companies, however its projected growth of 7%-10% in 2015 is much better than both the other companies.
Chesapeake’s (NYSE:CHK) main problem is that it fails to convert its production growth into earnings. According to calculation, the company’s 5 years earning growth rate stands at 6.47% and price to earnings growth ratio at 1.93. Its growth rate is quite similar to other companies having a production rate which is twice of Chesapeake’s (NYSE:CHK) production rate.
However it’s PED which stands at almost 2, deters investors from investing in it. A PED of 1 is considered cheap and a company like Devon energy which has a price to earnings growth rate of above 14 % and PED of less than 1 is considered more appealing to potential investors. Devon energy is projected to grow at a faster rate and its stock is available at a cheap valuation.
Chesapeake (NYSE:CHK) still remains mostly a natural gas producer which is one of the reasons its earnings won’t grow as fast as a company like Devon energy. Last quarter, 72% of the production by Chesapeake (NYSE:CHK) was natural gas compared to Devon energy which produced it at around 40%. This results in lower margins for the company which adversely effects its return on equity.
So to boost its return, Chesapeake (NYSE:CHK) needs to improve its margins. Reallocation of resources needs to take place and directors of Chesapeake (NYSE:CHK) need to see the shift in demand of the global market and its prices. While Chesapeake (NYSE:CHK) is a strong organization and its turnaround has it heading in the right direction as well, it still has a lot of work to do.
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