So Bad It’s Good? Chesapeake Energy Stock Garners Some New Fans

Chesapeake Energy (CHK) has emerged as a poster child for poor corporate governance over the last year, and now it is battling to rein in its debt, cope with low natural gas prices and reporting lower-than-expected earnings.

CHK Long Term Debt Quarterly YoY Growth Chart

CHK Long Term Debt Quarterly YoY Growth data by YCharts

Key to the company’s fate is its ability to cope with its debt load. Its management has pledged to cut debt to $9.54 billion, but as the chart above shows, the debt load has continued to climb, rising to $16 billion during the third quarter from $14.3 billion at the end of the second quarter.

CHK Cash from Operations TTM Chart

CHK Cash from Operations TTM data by YCharts

The combination of the cost of financing that debt and the toll that low natural gas prices has taken on its cash flow is another issue that won’t be resolved overnight.

Nonetheless, some analysts are becoming cautiously more optimistic about Chesapeake’s longer-term outlook. Canaccord Genuity analyst John Gerdes just boosted his price target for the stock to $29 a share, noting that the company is proceeding with asset divestitures and may see a more favorable operating environment next year, as natural gas prices have strengthened and the company boosts its production of liquids. Moreover, it agreed last week on terms of a new $2 billion unsecured five-year loan that will help it repay some of its more costly debt and rein in its interest expenses.

CHK Interest Expense Chart

CHK Interest Expense data by YCharts

The buyers could be drawn to Chesapeake's relatively low valuation, measured by PE ratio, vs. Devon (DVN) and Anadarko (APC), for instance.

CHK PE Ratio TTM Chart

CHK PE Ratio TTM data by YCharts

Or based on price-to-book value, which gets at assets.

CHK Price / Book Value Chart

CHK Price / Book Value data by YCharts

Or price-to-sales.

CHK Price / Sales Ratio TTM Chart

CHK Price / Sales Ratio TTM data by YCharts

Is Chesapeake a turnaround stock? In large part, the answer to that question will hinge on your outlook for natural gas prices and on your views on the company’s ability to complete its program of asset sales and return its balance sheet to a healthy position. Certainly, it is beginning to attract the attention of some value-oriented investors, from Mason Hawkins at Longleaf Partners to Mohnish Pabrai of Pabrai Investments; the latter was a buyer during the second quarter of 2012, according to regulatory filings.

Suzanne McGee is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.

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