Chesapeake Energy Corporation (CHK) is an Opportunistic Buy

Sinopec’s Deal

Sinopec will buy a 50% stake in Chesapeake’s 850,000 net acres of Mississippi Lime for more than $1 billion. Mississippi Lime was reported to have around 850 billion cubic feet equivalent of proved reserves and had an average production of 34,000 barrels a day of oil and gas in the fourth quarter. Steven Dixon, Chesapeake’s COO, commented: “We are excited to announce the execution of our Mississippi Lime joint venture with Sinopec, which moves us further along in achieving our asset sales goals and secures an excellent partner to share the capital costs required to actively develop this very large, liquids-rich resource play.”  As China has a huge shale oil/gas reserves, Laban Yu, a Jefferies analyst in Hong Kong, thought that Sinopec cared more about drilling and shale-fracking technology.

Peer Comparison

Chesapeake is trading at around $19.10 per share, with a total market cap of $12.70 billion. The market is valuing the company at nearly 5.6x EV/EBITDA. Another Chesapeake Energy Corporation (NYSE:CHK) peer, Anadarko Petroleum Corporation (NYSE:APC), is a much bigger company with $39.3 billion in total market cap. At $78.60 per share, Anadarko is trading a bit more expensively at 6.7x EV/EBITDA. Anadarko had around 2.5 billion BOE in total proved reserves, including 8.4 trillion cubic feet natural gas. Recently, Global Hunter Securities has increased its target price for Anadarko from $107 per share to $110 per share, a 40% premium on its current trading price. ExxonMobil is the largest company among the three, with nearly $395 billion in total market cap. At $87.70 per share, ExxonMobil is valued the cheapest, at 4.17x EV/EBITDA. It is also paying the highest dividend yield to shareholders, at 2.6%, while the dividend yields of Chesapeake and Anadarko are 1.7% and 0.4%, respectively.

My Foolish Take

Chesapeake Energy Corporation (NYSE:CHK), with its huge proved reserves in natural gas, could be considered an opportunistic play on its natural gas asset. The come back of natural gas prices could potentially drive the company’s share price much higher in the near future.

The article Chesapeake Energy is an Opportunistic Buy originally appeared on Fool.com and is written byAnh Hoang.

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