Chesapeake Energy Corporation (CHK)

First up is Chesapeake Energy, an exploration and development company in the North American hydrocarbon industry – which is a fancy way of saying that it’s a company that looks for, and exploits, natural gas and petroleum deposits. Chesapeake has operations across North America, with particularly large assets in Pennsylvania’s Marcellus shale and Louisiana’s Haynesville formation. More than two-thirds of Chesapeake’s proven reserves are in natural gas, with significant amounts of petroleum and natural gas liquids also present. Chesapeake holds assets in the Eagle Ford formation of Texas, but is making efforts to divest from that position in order to focus on its high-profit holdings in Pennsylvania and Louisiana.

In its last set of reported financial results, for 3Q22, Chesapeake showed total revenues of $4.19 billion, more than doubling from the $1.63 billion reported in 3Q21. Following from the revenues, Chesapeake showed cash from operations of $1.3 billion and net income of $883 million. The company’s EPS came in at $6.12 per diluted share; the non-GAAP adjusted net income was $5.06 per diluted share, a gain of 112% from the prior-year quarter.

In addition to these sound results, Chesapeake had a Q3 free cash flow of $773 million. This was a company record, and was achieved even as the company’s share repurchases and dividend payments totaled more than $1.9 billion during the quarter.

Chesapeake’s last common share dividend was paid on December 1, and the combination of regular and supplemental dividend payments came to $3.16 per share. At that rate, the dividend annualizes to $12.64 and yields a sky-high 14%. This is almost double the last reported inflation numbers.

Mizuho’s Kumar is optimistic that Chesapeake can continue to deliver results for return-oriented investors, noting: “CHK’s low-cost inventory in two of the leading gas shale plays (Appalachia and Haynesville) is complemented by a peer-leading cash return framework. Continued investment into ‘held for sale’ Eagle Ford assets dilutes corporate capital efficiencies, but successful divestiture could also unlock further shareholder value… Overall, we believe a slightly discounted valuation complemented by strong FCF generation and corporate execution can win the day over macro concerns.”

Extrapolating forward from this position, Kumar rates CHK shares a Buy, and sets his price target at $155, indicating confidence in a solid one-year upside potential of ~76%. Based on the current dividend yield and the expected price appreciation, the stock has ~90% potential total return profile.

Wall Street seems to be in agreement with Kumar on this one as all 8 of the recent analyst reviews on Chesapeake are positive, giving the stock its unanimous Strong Buy consensus rating. The shares are trading for $88.23 and their $145.88 average price target implies 65% upside for the coming year.