Why Chesapeake Looks Fairly Valued At $4

-98.08%
Downside
88.83
Market
1.70
Trefis
CHK: Chesapeake Energy logo
CHK
Chesapeake Energy

Chesapeake Energy (NYSE: CHK) recently reported its fourth-quarter and full-year 2017 results. The company reported an annual growth of 8% in revenue, largely benefiting from the recovery in crude oil and natural gas prices throughout 2017. Based on our analysis, we expect a fair price of $4 for the company, significantly higher than the current market price. We believe that the market is underestimating the benefit from higher expected crude oil and natural gas prices this year.

Our price estimate is based on expected EBITDA of $2.5 Bil, a Price/EBITDA multiple of 1.5, and an average share count of 906 million. This has been detailed in our interactive dashboard.

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We expect Chesapeake’s revenue to grow 7% to $9.74 billion in 2018. With a nearly 26% EBITDA margin, the same as that for 2017, this gives us an EBITDA estimate of $2.5 billion. The revenue growth will be driven by both volume and price increases.

As per the company’s latest guidance, Chesapeake expects its 2018 total production level to grow by ~3% Y-o-Y. The company is relatively more optimistic about its crude oil production output. Total crude oil output in 2018 is expected to grow by 5% Y-o-Y. Additionally, the extension of OPEC and non-OPEC allies’ oil production cuts are likely to continue and support global oil prices in 2018. This should result in the company’s oil segment to be the largest revenue driver in 2018. With expected crude oil sales volume of 95.55 mbbl/day and expected average price of $60.22/ bbl, we arrive at total crude oil revenue estimate of $2.1 billion for 2018. This suggests an annual revenue growth rate of 24% in the company’s oil segment.

Similar macroeconomic factors are expected to support natural gas prices in the current year. However, the growth rate in the prices of natural gas is not expected to be as significant as that for oil. With an expected natural gas sales volume of 2454 mmcf/day and expected price of $2.84/ mcf, Chesapeake’s total natural gas revenue is likely to hit $2.5 billion in 2018.

Total NGLs sales revenue and Marketing, Gathering & Compression revenue is expected to subside at $493 million and $4.6 billion, respectively. This gives us an estimate of $9.7 billion total revenue in 2018 for the company.

Thus, on the basis of our forecast, we expect the company to report a Y-o-Y annual revenue growth rate of 7% in 2018, a fair recovery from the downturn experienced by the company in 2016. Our price estimate for the company is $4.31, ~30% higher than the current market price. Outperformance is expected with an expectation of a significant recovery in oil prices throughout 2018.

 

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