Chesapeake: Battered Buy in Shale

05/12/2017 2:50 am EST


Jim Powell

Principal Analyst, Global Changes & Opportunities

When looking for an undervalued company with good long-term prospects, it can be useful to find one that has taken more than one hit, explains Jim Powell, editor of Global Changes & Opportunities.

That’s the case with Chesapeake Energy (CHK), a company in the battered shale gas industry. Chesapeake was also severely damaged by some bad decisions by its former management team.

Now this fallen angel appears to be moving back up again. Chesapeake is no stranger to success. The company was the biggest growth story during the shale gas boom.

Under its aggressive leadership, the company went from being a second rate driller in the early 2000s to America’s largest gas producer after ExxonMobil (XOM).

As you may have guessed, Chesapeake’s growth was fueled by staggering amounts of capital that it borrowed during the boom. When the boom turned into a bust, the company found itself in deep trouble.

For several years, it appeared that Chesapeake might not survive.  However, the old management team has been replaced, energy prices are slowly recovering, and Chesapeake’s debt has been slashed from $21.3 billion to $10.3 billion. At the same time, the company’s profits are higher than they were when oil was over $100 a barrel.

Because Chesapeake’s recovery is still a work in progress, the stock must be considered more speculative than some of our other energy stocks. Nevertheless, I think the odds of success are very much in an investor’s favor.

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