Chesapeake Energy Corp (CHK)

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Chesapeake Energy: Pulling Out of Its Death Spiral?
By Ben Levisohn

CapitalOne Securities analyst Phillips Johnston explains that Chesapeake Energy (CHK) “seems to be pulling out of its death spiral” as he raises his rating on the stock to Equalweight from Underweight:

Matt Nager/Bloomberg News

Upgrading Chesapeake to Equalweight from Underweight given a significantly improved financial outlook following the recent steps it has taken to rehabilitate its balance sheet & liquidity and to eliminate its vast midstream liabilities. These steps, combined w/ improved capital efficiency and a less bleak outlook for ’17 than originally envisioned, leave key debt and valuation metrics less dire than we previously modeled and significantly improve chances that Chesapeake will survive the downturn.

Make no mistake, Chesapeake is by no means out of the woods and many challenges lie ahead, especially regarding looming debt maturities in the next several years. The company’s remaining asset portfolio is diverse but arguably below average from a quality standpoint, and we think a further improvement in commodity prices will be required for Chesapeake to sustainably grow production within cash flow. However, the company seems to be pulling out of its death spiral, the incremental outlook has been improving, and we are hard pressed to identify new potential bear concerns that will drive meaningful underperformance going forward, outside of a deteriorating commodity price environment (which we don’t expect).