Why BofA reiterates an Underperform rating on Chesapeake stock and estimates its 12-year target price at $9.
Bank of America Merrill Lynch has restated its rating of Underperform to the stock of Chesapeake Energy Corp., and has dropped its twelve month target price to $9. The US based natural gas and liquid producer’s cash flow are loaded with outright leverage and heavy discount realization, which were inherited by the strategy previously adopted by the company’s management.
Crude oil prices have collapsed by over 50% since last June. Because of this dramatic decline, major oil companies have to reduce their spending including Chesapeake. The company before the release of its fourth quarter earnings report planned to reduce its capital expenditures for the current fiscal year to almost $4 to $4.5 billion. Though, in spite of the reduction in spending, Bank of America specified that Chesapeake was outspending its cash by 100%, with the hedge advantage of $1.2 billion in FY2015.
The management of the oil company has taken additional step to cut the capital spending to equal the lower levels and forcing it to come in between $3 to $3.5 billion. BofA thinks that as per the new capital expenditure budget Chesapeake will still cost nearly $2.1 billion this year, but the rate should be in line with the cash flow of the company.
Though, the capital spending cut means that it has to detriment on some of its production services. The company would be unable to cut its elevated multiples due to decrease in production of liquid, and the midway payment requirements of the company will also go worse.
On Friday, the benchmark of United States for crude oil, West Texas Intermediate (WTI) was dealing at $49.14 per barrel, while Brent Crude was trading at $54.95 each barrel. In the meantime, NYMEX was trading at $2.71 million MMBtu.
The American bank specified that if WTI and gas reaches $70 and $4 in the next 3 years, Chesapeake will enjoy a $4.5 billion worth of cash flow. It further specified that the mid cycle average of six times and $21 billion of enterprise value the price projection of the firm is fairly justified at $9.
The bank also defend the under perform rating by specifying that the company’s management is surrounded by problems. However, they have taken some positive steps to enhance operations and cut cost but it is still under high level of debt that was the main reason that it has given the bank the rating of Under perform.
Presently, Chesapeake stock was covered by 33 analysts, who have given $18.32 target price on an average.11 rated the stock as buy with 18 hold and 4 sell rating.