Chesapeake Energy Corporation

(NYSE: CHK)
Last Price: $22.41 VIEW: HOLD

7/19/2013

Chesapeake Energy Corporation (Chesapeake) is a natural gas and oil exploration and production company. Chesapeake is engaged in the exploration, development and acquisition of properties for the production of natural gas and oil from underground reservoirs. It also provides substantial marketing, midstream, drilling and other oilfield services. Its operations are located onshore and in the continental United States. As of December 31, 2011, the Company owned interests in approximately 45,700 producing natural gas and oil wells that produced approximately 3.5 billion cubic feet of natural gas equivalent per day, net to its interest. It operates in three segments: exploration and production; marketing, gathering and compression, and oilfield services. In March 2011, it sold all of its Fayetteville Shale assets. In July 2012, it sold its interest in Chesapeake Midstream Partners, L.P. to Global Infrastructure Partners. In October 2012, it sold asset packages in the Permian Basin.

Sector: Basic Materials Highlights: Chesapeake Energy Corporation (Chesapeake) is a natural gas and oil exploration and production company. Industry: Independent Oil & Gas

The stock closed yesterdays trading session at $22.33. In the past year, the stock has hit a 52-week low of $16.23 and 52-week high of $22.97. The intrinsic value of the stock is higher than the current price. CHK has a market cap of $14.59 billion and is part of the Basic materials sector. GROWTH AND BALANCE SHEET The company reported that it earned $15 million, or 0.02 cents basic earnings per share, for the quarter that ended March 31. That's up from -$71 million, -11 cents basic earnings per share for the same quarter last year. Revenue increased 41.6 percent, to $3,424 million from $2,419 million, with revenue increasing in every business segment Natural Gas, Oil and NGL, Marketing, gathering and compression, and Oilfield services. CHKs consensus earnings forecast for the quarter ending June 2013 is of $0.27 to $0.48 per share. Operating margin was 6.3 percent, compared to 0.3 percent in the first quarter of fiscal 2012. Cash flow from operating activities was $1,176 million, an increase of 29% over the same period last year. VALUATION CHK PE (using the average earning of the last three years) stands at 19.95 below the industry average of 46.63 and above the S&P 500 average of 18.43. The company is currently trading above the preferable P/E ratio of 15x and over the last five years. CHK's current Price/Sales of 1.09 is below the average of its industry, of 2.04. CHKs head to head comparison to its main competitors shows that the company has better gross margin than most of its competitors but worst operating margin of them all. Net income and EPS are negative. The stock is currently trading 16.7% below its intrinsic value of $26.90 this suggests that the stock is undervalued at these levels. The beta of 1.53 implies higher volatility of the stock with respect to the S&P 500. CHK has not shown satisfying earnings consistency over the last five, with three dips and two negative end of year EPS. CHKs earnings per share over the last five years have shown negative growth of -19.76%. However, the current quarter earnings in comparison to the same quarter last year have grown by 41.5% which is well above the required level of 15%. CHKs current price levels are only 2.4% below the 52 week high of $22.97, and the technical indicators are neutral. The majority of the analyst ratings are hold. CHKs Total Debt/Equity of 75.67 is well above the required maximum, and it is above the industry average of 16.96. CHK has paid a quarterly dividend 8.75 cent per common share. RECOMMENDATION for next 6 months: We initiate our coverage with HOLD. The company has demonstrated neutral signs but the valuation is cheap at current price level. CHK is up 37.73% year-to-date. Our overall score for CHK is 5.82. For options trading we suggest: Buy the August 2013 call with a strike of 23.00 priced at $0.56 per contract Net credit to start: $0.56

 Chesapeake Energy Corporation CHK 14.59B Beta 28.33B 1 Month Stock Returns N/A Year to Date Stock Returns 0.27 1 Year Stock Returns 1.09 3 Year Stock Returns 1.15 52-Week Change 2.13 S&P500 52-Week Change 5.9 52-Week High 1.60% 52-Week Low 50-Day Moving Average 1.12% 200-Day Moving Average

VALUATION Market Cap: Enterprise Value P/E PEG Ratio Price/Sales Price/Book Enterprise Value/Revenue Enterprise Value/EBITDA Dividend Yield Held by insiders NEWS and CALENDAR

1.53 6.23% 37.24% 19.33% 12.87% 29.83% 23.98% 22.97 16.23 21.17 20.07

Fri, Jul 19, 2013 Guru In Focus: What Is Mohnish Pabrai Buying? Thu, Jul 18, 2013 Natural gas liquids prices continue to creep up with support from oils rally Thu, Jul 18, 2013 5 Companies That Have OPEC "Concerned" Wed, Jul 17, 2013 3 Natural Gas Stocks to Buy Now! CHK Strengths Efficiency of production Low cost producer Second-largest producer of gas in US CHK Weakness Unsuccessful acquisitions business model Business structure Overleveraged

 Competitor Comparison CHK Market Cap: 14.59B Employees: 12,000 Qtrly Rev Growth 0.42 Revenue 13.32 Gross Margin 0.73 EBITDA 4.81 Operating Margin 0.14 - Net Income 854.00M EPS -1.33 P/E N/A PEG 0.27 P/S 1.09 APC 44.57B 5,200 0.09 13.61B 0.86 7.58B 0.15 689.00M 4.07 64.55 0.95 3.27 BG.L 40.40B 5,710 0.006 18.96 N/A 11.14 0.43 3.27B 1.32 18.01 1.04 3.21 COP 80.16B 17,100 -0.04 59.80B 0.47 21.66B 0.24 7.26B 6.16 10.64 3.47 1.33 Industry N/A N/A N/A N/A 0.47 N/A 0.28 N/A N/A 46.63 N/A 2.4

Stock valuation model

The model rates stocks from 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock's expected risk and return. I am using different fundamental and technical factors in order to rank a stock. Intrinsic value of the stock Investors should buy stocks selling at a discount to their intrinsic value, and then patiently wait for the fair value of their investments to be realized.
Chesapeake Energy Corporation (CHK) D0 gS gL Req. Return Time Dividend Terminal Value Total Cash Flow Present Value Intrinsic Value 0.35 11% 5.92% for next 5 years thereafter

7.65%
0 1 0.39 0.39 0.36 26.90 2 0.43 0.43 0.37 3 0.48 0.48 0.38 4 0.53 0.53 0.40 5 0.59 36.11 36.70 25.39

CHKs intrinsic value is $26.90 the current price is $22.41, the stock trades 16.7% below its fair value. The Sensitivity analysis of the stock varying the growth rate of the EPS are presented in the table below.
Intrinsic gL 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% Value 26.90 12.09 13.54 15.45 18.08 21.94 28.13 39.70 69.08

Based on the prospects of the company the valuation range is from $12.09 to $69.08. Financials The financial health of the company the higher the better, we evaluate all the financial ratios of the company. Sentiment Investors sentiment for the stock. Analyst ratings The model assigns a value according to analysts recommendation for the stock. Analyst rating on Reuters.com is 6 Buy, 3 Outperform, 21 Hold, and 3 Underperform. Earnings Consistency We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. CHKs annual EPS for the last 5 years were 4.39, -9.57, 2.51, 2.32, and -1.46 this type of earnings action is not favorable. Total Debt/Equity The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry CHKs Total Debt/Equity of 75.67 is above the required maximum, and it is well above the industry average of 16.96.

EPS This Quarter VS Same Quarter Last Year The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. CHKs EPS growth for this quarter relative to the same quarter a year earlier is 41.5%, above our target. Annual Earnings Growth This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. CHKs annual earnings growth rate over the past five years is -19.76%, below our target growth rate. Current Price Level Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. CHK's 52 week high is $22.97 current price is $22.41, is 2.40% below the 52 week high. P/E Ratio The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. The company has a P/E ratio of 19.95 the average industry P/E ratio is 46.63 and is above the S&P 500 P/E ratio of 18.43. Insider Ownership When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders. Insiders own 0.31% of CHK stock. Management's representation is not large enough. This does not satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model. Technical Analysis The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value. CHK is trading in the range of $19.32 - $22.48 in the past 30 days. The stock has been showing support around $20.9 and resistance in the $21.70 range. The stock is trading above the 50-Day Moving Average and 200-Day Moving Average. RSI(14): 67.90. From the graph on

page 1 it can be seen that since late June, when the stock has bounced off the 200-SMA, the price has been going higher. The stock is currently at a previous resistance level at $22.50. Our indicators give a neutral view on CHK. Chesapeake Energy Corporation COMPANY: CHK Intrinsic value o f the stock Financials Sentiment Analyst ratings Earnings Consistency Total Debt/Equity Quarterly EPS change Annual Earnings Growth Current Price Level P/E Ratio Insider Ownership Technical Analysis SCORE RECOMMENDATION: 7 5 6 6 2 1 10 2 10 6 3 6 64 5.82

HOLD