Exclusive: Chesapeake’s Journey to Becoming ‘Most Compelling Investment Opportunity’

Chesapeake Energy Corp. is putting its money where its mouth is, so to speak.

Six months after authorizing a $1 billion share buyback program in December, the Oklahoma City-based producer has done it again. Chesapeake announced this week its board of directors agreed to double the buyback authorization to $2 billion proffered by the end of 2023.

Since December, the company has repurchased roughly 5.4 million shares of its common stock at an average price of approximately $89 per share.

“We’re putting our money where our mouth is. We think our share price is low. We think it’s very compelling to be buying our stock today.”—Domenic J. “Nick” Dell’Osso Jr., President and CEO, Chesapeake Energy Corp.

“We have a base dividend of $2 a share and then all of our free cash flow on top of that, we will return 50% of that to shareholders through a variable dividend. And then in addition to that, we have this buyback program,” CEO Nick Dell’Osso told Hart Energy in an exclusive interview.

“We’re putting our money where our mouth is. We think our share price is low. We think it’s very compelling to be buying our stock today.”

Between the June 22 announcement and market close on June 23, the stock dropped almost 8% to end the trading day at $76.34/share.

Dell’Osso said Chesapeake is on track to generate more free cash flow during the next five years than the entirety of its current market cap, valued close to $11 billion on June 24.

The market’s poor reception means it has not “fully adopted or recognized the cash that we will generate over the next five years. And so that could mean that investors don’t believe in the strip and they don’t believe in commodity prices,” Dell’Osso said.

“But we think it’s more to do with us being new out of bankruptcy and needing to prove our track record and showcase to investors that what we’re doing is sustainable.”

Analysts at Credit Suisse initiated coverage last week of Chesapeake with an “outperform” rating and a $115/share price target.

“Our thesis centers on [Chesapeake] having emerged from restructuring with a substantially stronger balance sheet and lower cost structure, while shares continue to trade at a discount to peers despite offering a sector-leading cash return yield,” said analyst William Janela in a note to investors. “At current strip prices, we see CHK generating about $3.9 billion of organic [free cash flow] and returning >$2 billion in total dividends in 2023, representing a >20% cash return yield.”

Moreover, Janela said, share buybacks are additive to the formula. If the firm executives on the full $2 billion authorization within the given timeline, its total cash return yield pops to about 30%–the highest yield within its exploration and production peer group, which carries an average 12%.

Dell’Osso said the company has a story to tell investors about being “frankly, the most compelling investment opportunity in the energy space right now.”

“One thing you see from a lot of companies right now is a discussion of a lot of cash flow, big giant cash flow numbers, but only a much smaller group are actually returning that cash to shareholders in a large magnitude as well,” he said.