Does Chesapeake Have More Upside Potential?

With shares of Chesapeake Energy Corporation (NYSE:CHK) trading at around $21.87, is CHK an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock's Movement

Everything covered in this article will be important in regards to the future potential for Chesapeake, but there is one factor that stands out above the rest, which is heavy insider buying over the past month. It's important to understand that there has been heavy insider selling throughout the broader market recently, not heavy insider buying. Furthermore, when insiders buy with conviction, it almost always leads to higher stock prices down the road. This factor alone makes Chesapeake appealing.

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Chesapeake has shown steady revenue improvements on an annual basis, but the bottom line has been inconsistent. A lot of this had to do with heavy spending. However, with a new CEO in place, Chesapeake is more focused on fiscal responsibility, mostly by paying a lot more attention to its most profitable assets. It should also be noted that management has promised to return more capital to shareholders as soon as possible.

Q1 is old news, but for a quick overview to show the direction of the company, below are several important points:

41.5 percent revenue increase year-over-year Average daily production increased 7.5 percent year-over-year Natural gas equivalent realized price increased 10.9 percent year-over-year Production expenses decreased 18.1 percent year-over-year Operation cash flow increased 237.2 percent year-over-year

It looks as though Chesapeake is heading in the right direction, and direction is everything on Wall Street.

The chart below shows some basic fundamentals for Chesapeake, Anadarko Petroleum Corporation (NYSE:APC), and Devon Energy Corporation (NYSE:DVN).

	CHK	APC	DVN
Trailing P/E	N/A	64.65	N/A
Forward P/E	10.64	16.52	11.21
Profit Margin	-5.13%	5.11%	-22.15%
ROE	-2.65%	3.43%	-9.30%
Operating Cash Flow	3.49B	8.95B	4.93B
Dividend Yield	1.60%	0.40%	1.50%
Short Position	11.40%	2.00%	2.50%

Let's take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Strong

Chesapeake has performed well over the past year, and it has outperformed its peers year-to-date as well over the past month.

	1 Month	Year-To-Date	1 Year	3 Year
CHK	14.46%	33.15%	43.34%	-1.66%
APC	4.32%	19.16%	52.91%	102.6%
DVN	1.20%	10.54%	0.26%	-8.89%

At $21.87, Chesapeake is trading above its averages.

50-Day SMA	20.01
200-Day SMA	19.13

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E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Chesapeake is close to the industry average of 0.50. The debt-to-equity ratio is also likely to improve in the future.

	Debt-To-Equity	Cash	Long-Term Debt
CHK	0.76	33.00M	13.63B
APC	0.66	3.74B	14.76B
DVN	0.62	6.52B	12.15B

E = Earnings Have Been Inconsistent

Earnings have been inconsistent over the years, which has had a lot to do with heavy spending. Chesapeake is now more focused on efficiency. As far as revenue goes, the pace has slowed, but there have still been annual improvements for three consecutive years. This is a positive considering many companies throughout the broader market suffered revenue setbacks in 2012.

Fiscal Year	2008	2009	2010	2011	2012
Revenue ($) in millions	11,629	7,702	9,366	11,635	12,316
Diluted EPS ($)	1.14	-9.57	2.51	2.32	-1.46

When we look at the last quarter on a year-over-year basis, we see improvements in revenue and earnings. However, revenue and earnings both declined on a sequential basis.

Quarter	Mar. 31, 2012	Jun. 30, 2012	Sep. 30, 2012	Dec. 31, 2012	Mar. 31, 2013
Revenue ($) in millions	2,419	3,389	2,970	3,539	3,424
Diluted EPS ($)	-0.11	1.24	-3.19	0.39	0.02

Now let's take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

Conclusion

Chesapeake is the second largest natural gas producer in the United States, it has improved oil production, and the right management seems to be in place. At the moment, it looks as though it's all systems go. However, Chesapeake won't be resilient if a deflationary environment is ahead of us. Many people think inflation is the big threat, but the Federal Reserve has been fighting deflation for years for a reason.