A Board Member Snapped Up 5,000 Shares of This Energy Company
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Thomas Ryan, a member of the Board of Directors at Chesapeake Energy (NYSE: CHK), directly purchased 5,000 shares of stock on June 11 at an average price of $21.51 per share. This doubled his holdings of Chesapeake. We track insider purchases because studies show that stocks bought by insiders tend to narrowly outperform the market on average (read our analysis).
While we don’t recommend imitating every insider purchase, we think that they can be treated similarly to stock screens with investors doing further research on any interesting names which come up through reviewing recent buys. Ryan, interestingly, had been criticized earlier this month for serving as CEO of Service Corp. International and sitting on other Boards, with two proxy firms claiming that he is not focused enough on providing oversight for Chesapeake’s management.
Chesapeake’s CEO departed earlier this year; billionaire activist Carl Icahn (see Icahn's recent stock picks) had taken a large stake in the company in 2012 following a crisis at the company related to the CEO’s business activities and a potential cash shortfall. A number of asset sales have placed Chesapeake on firmer footing, and revenue grew 42% last quarter compared to the first quarter of 2012. While costs also rose, the company managed to report a small profit and cash flow from operations was over $900 million (though this was still not enough to cover Chesapeake’s capital expenses).
Wall Street analysts expect adjusted earnings per share of $1.49 this year, which makes for a current-year P/E multiple of 14. Growth in EPS next year means that the stock is trading at only 10 times forward earnings estimates. Those figures likely assume some increase in natural gas prices, but they also represent a discount to where the sell-side places some other natural gas focused companies. In addition to Icahn, Southeastern Asset Management -- managed by billionaire Mason Hawkins -- was a major owner of Chesapeake with over 89 million shares in its portfolio at the end of March. Southeastern had, in fact, recommended Ryan as a potential Board member at the company.
SandRidge Energy (NYSE: SD) and Devon Energy are the closest peers for Chesapeake. SandRidge has been experiencing its own management and business-related problems, and is expected to report net losses both this year and in 2014 even as its sales have been up on higher production. 15% of the float is held short as a number of market players are bearish on the natural gas producer. Devon trades at 11 times analyst consensus for 2014, essentially in line with Chesapeake. We’d note that that company’s revenue actually declined in the first quarter of 2013 versus a year earlier, and that the stock price is down slightly over the last year against a rising market.
We can also compare Chesapeake to oil and gas exploration and production companies Apache (NYSE: APA) and Encana (NYSE: ECA). Analysts expect Encana’s adjusted earnings per share to dip this year before rebounding in 2014; specifically, the forward price-to-earnings multiple is 14. Income investors might note that the company has been making quarterly dividend payments of $0.20 per share since late 2009, making for an annual yield of 4.50%.
Apache, which is somewhat more diversified between oil and gas, saw both revenue and earnings decline 10% in its most recent quarter compared to the same period in the previous year, but analysts are optimistic here as well: their forecasts actually imply a forward P/E of 9.
As a result, we’d recommend checking out Apache, although investors should be wary of the optimism coming from analysts as far as any of these projected increases in earnings per share are concerned. Certainly, Chesapeake seems competitive among its peers in terms of valuation, and the company has a good position in shale gas in the event that natural gas prices do rise. It’s at least a good stock to be watching for further developments and depending on how much weight an investor places on this insider purchase, it may be well worth further research.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in CHK.The Motley Fool owns shares of Apache and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!