Thomas Ryan, a member of the Board of Directors at Chesapeake Energy Corporation (NYSE:CHK), directly purchased 5,000 shares of stock on June 11th at an average price of $21.51 per share. This doubled his holdings of Chesapeake Energy Corporation (NYSE:CHK). We track insider purchases because studies show that stocks bought by insiders tend to narrowly outperform the market on average (read our analysis of studies on insider trading). While we don’t recommend imitating every insider purchase, we think that they can be treated similarly to stock screens with investors doing further research on any interesting names which come up though reviewing recent buys. Ryan, interestingly, had been criticized earlier this month for serving as CEO of Service Corp. International and sitting on other Boards of Directors, with two proxy firms claiming that he is not focused enough on providing oversight for Chesapeake Energy Corporation (NYSE:CHK)’s management.
Chesapeake Energy Corporation (NYSE:CHK)’s CEO departed earlier this year; billionaire activist Carl Icahn (see Icahn’s recent stock picks) had taken a large stake in the company in 2012 following a crisis at the company related to the CEO’s business activities and a potential cash shortfall. A number of asset sales have placed Chesapeake on firmer footing, and revenue grew by 42% last quarter compared to the first quarter of 2012. While costs also rose the company managed to report a small profit and cash flow from operations was over $900 million (though this was still not enough to cover Chesapeake Energy Corporation (NYSE:CHK)’s capital expenses).
Wall Street analysts expect adjusted earnings per share of $1.49 this year, which makes for a current-year P/E multiple of 14. Growth in EPS next year means that the stock is trading at only 10 times forward earnings estimates. Those figures likely assume some increase in natural gas prices, but they also represent a discount to where the sell-side places some other natural gas focused companies. In addition to Icahn, Southeastern Asset Management- managed by billionaire Mason Hawkins- was a major owner of Chesapeake with over 89 million shares in its portfolio at the end of March. Southeastern had in fact recommended Ryan as a potential Board member at the company.
SandRidge Energy Inc. (NYSE:SD) and Devon Energy Corp (NYSE:DVN) are the closest peers for Chesapeake. SandRidge Energy Inc. (NYSE:SD) has been experiencing its own management and business-related problems, and is expected to report net losses both this year and in 2014 even as its sales have been up on higher production. 15% of the float is held short as a number of market players are bearish on the natural gas producer. Devon Energy Corp (NYSE:DVN) trades at 11 times analyst consensus for 2014, essentially in line with Chesapeake. We’d note that that company’s revenue actually declined in the first quarter of 2013 versus a year earlier, and that the stock price is down slightly over the last year against a rising market.
We can also compare Chesapeake to oil and gas exploration and production companies Apache Corporation (NYSE:APA) and Encana Corporation (USA) (NYSE:ECA). Analysts expect Encana Corporation (USA) (NYSE:ECA)’s adjusted earnings per share to dip this year before rebounding in 2014; specifically, the forward price-to-earnings multiple is 14. Income investors might note that the company has been making quarterly dividend payments of 20 cents per share since late 2009, making for an annual yield of 4.5%. Apache Corporation (NYSE:APA), which is somewhat more diversified between oil and gas, had both revenue and earnings decline by 10% in its most recent quarter compared to the same period in the previous year but analysts are optimistic here as well: their forecasts actually imply a forward P/E of 9.
As a result we’d recommend checking out Apache Corporation (NYSE:APA), although investors should be wary of the optimism coming from analysts as far as any of these projected increases in earnings per share. Certainly Chesapeake Energy Corporation (NYSE:CHK) seems competitive with its peers in terms of valuation, and the company has a good position in shale gas in the event that nat gas prices do rise. It’s at least a good stock to be watching for further developments and depending on how much weight an investor places on this insider purchase it may be well worth further research.
Disclosure: I own no shares of any stocks mentioned in this article.
