Chesapeake Energy Delivers Again

The chart above hardly looks like a company that has been clicking on all cylinders for the last 12 months. However, it serves as an example for investors that short-term stock movements oftentimes do not reflect the true fundamentals at publicly traded companies. Shares of Chesapeake Energy (CHK), as you can see, have been moving sideways for a year.

It is interesting to note, however, that CHK management has been doing an exceptional job at creating value for shareholders. During this time, Chesapeake’s book value has risen by more than 140 percent, from $4.2 billion on 9/30/05 to $10.2 billion on 9/30/06. The company’s public enterprise value, though, has only risen by about 10 percent during that time, leaving one to conclude that the stock price has a lot of catching up to do in coming months.

Note: the stock price has dropped slightly over the last year, but the enterprise value of the company has risen due to share count dilution, both from the issuance of convertible preferred stock and additional equity used to fund CHK’s expansion.

Chesapeake reported another excellent quarter last night, as Q3 earnings hit $0.83, 11 cents above consensus estimates and 3 cents higher than the most bullish projection on the Street. Revenue hit $1.93 billion for the period, versus estimates of $1.47 billion. Most impressive of all, CHK raised its production growth targets for 2007 and 2008, from 11% and 6%, to 16% and 12%, respectively.

Wall Street analysts are currently projecting Chesapeake’s earnings in 2007 to be flat, followed by a drop in 2008. However, given the production growth that the company seems comfortable in forecasting, natural gas prices would have to fall meaningfully for such an outlook to prove accurate. I suspect that Wall Street is overly pessimistic about Chesapeake’s earnings power over the next couple of years (and beyond). As a result, I would not expect the stock to continue to trade sideways indefinitely, as it has for the last 12 months.

Full Disclosure: I own shares of Chesapeake Energy (CHK) personally, as do my clients.