Chesapeake Energy: Update Target Price

05/09/2014 4:45 pm EST


Jim Jubak

Founder and Editor,

The second largest US producer of natural gas is now on track for a monster turnaround, and MoneyShow's Jim Jubak is raising his target price as of May 9, 2014.

Chesapeake Energy (CHK) closed in on a big milestone when it reported first quarter earnings on May 7. The company raised its forecast for 2014 operating cash flow to $5.8 billion to $6 billion from the previous estimate of $5.1 billion to $5.3 billion. Add in $900 million in asset sales, so far, this year, and Chesapeake is on track to cover capital spending (budgeted at $5.4 billion for 2014) for the first time since 2001. That would mark a huge turnaround for a company that spent so much on acquiring its portfolio of natural gas assets that it seemed likely to sink under the load. (Even after asset sales, Chesapeake is the second largest US producer of natural gas—behind only ExxonMobil (XOM).)

Which isn’t to say that Chesapeake didn’t announce some pretty impressive shorter-term numbers from its basic business of getting natural gas out of the ground. Earnings for the quarter came in 11 cents a share (at 59 cents a share) above analyst consensus. Revenue increased by 47.4% year over year to $5.05 billion against the $4.3 billion consensus. (Chesapeake Energy is a member of my Jubak’s Picks Portfolio.)

Not bad at all in what is still a market suffering from very depressed prices for natural gas.

Prices have moved off the bottom for natural gas (realized natural gas prices moved up to $3.27 per million cubic feet from $1.90) and that certainly contributed to Chesapeake’s earnings surprise. But so did a big increase in production. The company saw first quarter production climb 11% year over year (after adjusting for asset sales). For 2014, Chesapeake raised its outlook on production growth to 9% to 12% growth. Liquids rose to 29% of total volume, up from 24% in the first quarter of 2013. The biggest boost came from Chesapeake’s Utica shale production, which climbed by 59%.

Last, but not least, Chesapeake continued to cut costs, reducing the cost of producing a barrel of oil (or its equivalent) by another 8% in the quarter. The cost to produce a barrel of oil equivalent fell to $4.73 in the period from $5.14 in the first quarter of 2013.

As of May 9, I’m raising my target price for Chesapeake Energy to $38 a share by the end of 2014 from the previous target of $33.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Chesapeake Energy as of the end of March. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund’s holdings almost totally to cash.

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