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Chesapeake: If The Market Trades The Data, Driscoll's Case Could Be Worth A Lot More Than 20%

Chesapeake Energy shares took a bath on Friday, May 6, 2016 – losing ~20% on the day.

Many in the market are attributing this ~20% haircut as a market-reaction to a Barron’s report highlighting comments from Barclay’s analyst Thomas Driscoll.

In the report, according to Barron’s, Driscoll calls out Chesapeake for being worth "just $1".

But does the data back the Driscoll case?

We use spatial AND E&P peer group data to present what we believe is the data-based version of the "Driscoll case".

Chesapeake Energy (NYSE:CHK) shares took a bath on Friday, May 6, 2016 - losing ~20% on the day. Most of the losses on the day took shape during the final three hours of trading, with Chesapeake trading slightly positive on the day prior to its freefall. Many in the market are attributing this ~20% haircut as a market reaction to a Barron's report highlighting comments from Barclay's analyst Thomas Driscoll. In the report, according to Barron's, Driscoll calls out Chesapeake's so called "unwarranted 5%-10% premium to peer group multiples of mid-cycle debt-adjusted cash flow" in which Driscoll uses "market prices for the company's convertible preferred notes" and further uses "the face value of the convertible preferreds," referencing Chesapeake's vehicles in both instances, of course, as justification for his price target.

Now, without having reviewed the report in its entirety and without backing out the calculations (in this instance, I could make commentary on Driscoll's report directly - which I'll refer to as the "Driscoll case" going forward), this note won't try to rebut Driscoll but rather point out that Driscoll does have a data-based case for stating Chesapeake as an outlier to peers from a valuation-multiple to risk standpoint. Again, this note is neither defending the particular case made by Driscoll nor rebutting the case - but simply stating that from a purely data-based standpoint Chesapeake is an outlier to peers from a valuation-multiple to risk standpoint for both broader energy as well as, more appropriately, E&P peers. I'll explain.

Staying General with SandDance…

When viewing Chesapeake within the context of all the energy names that our firm monitors - we monitor 86 names as a firm from at least a data tracking standpoint - and when viewing Chesapeake in contextual terms of 1) EV/EBITDA and 2) 12-Month Default Probability, we can see Chesapeake as one of only a few clear outliers:

Prior to explaining this data-visual - a few concessions.

First, I concede that EBITDA isn't the "end all, be all" metric; it can be skewed based on several variables with varying levels of irregularity (especially in energy). Second, we as a firm use a slightly adjusted EBITDA that tries to normalize it (in excluding some of the noise mentioned in my first concession) - so our EBITDA (like most of the industries) will vary slightly from other data-provider...


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