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Earnings Front: Chesapeake Energy

By Chris Tyler, Optionetics.com | Tue May 1, 2012 9:09AM PT


The Company

Large capper and “well-drilled” natural gas and oil producer Chesapeake Energy (CHK) reports after the close Tuesday night. Aside from prices of natural gas sliding to multi-year lows in 2012 and hurting margins for the outfit, the company has experienced some bearish controversy regarding CEO Aubrey McClendon’s stake in The Founders Well Participation Program despite prior proxy disclosure and no conflict of interest with regards to Chesapeake according to the company’s General Counsel.

Most recently, Chesapeake announced this morning the FWPP will be renegotiated to provide for its early termination on June 30, 2014 versus December 31, 2015. As of this writing shares are bid higher by about 6% in the premarket following the news release.

The Number

For its FY12Q1, Chesapeake is expected to produce profits of $0.28 per share compared to the prior year’s figure of $0.75 representing a decline of about 63%. Sales are expected to increase to $2.71B versus $1.61B

Quarter

Earnings Actual

Earnings Est.

Earnings YOY %

Revenue Actual

Revenue Est.

Revenue YOY %

FY11Q4

$0.58

$0.58

(17%)

$2.72B

$3.18B

38%

FY11Q3

$0.72

$0.68

3%

$3.97B

$3.27B

54%

FY11Q2

$0.76

$0.71

1%

$3.31B

$2.78B

65%

FY11Q1

$0.75

$0.70

(8.5%)

$1.61B

$1.61B

(42%)

Figure 1: Chesapeake (CHK) Past Top & Bottom Line Data

Trader reaction to the past four reports has been mixed when comparing headline results to Street estimates shown above in Figure 1. Working backwards from last quarter’s mixed report of in-line earnings and weaker-than-forecast revenue growth, on a close-to-close basis, is as follows: -2.4%, -6.75%, 2.75% and one year ago, -5.72%.

The Chart

Figure 2: Chesapeake (CHK) Daily Chart

Bulls looking to the technical tea leaves for clues have a corrective weekly Elliott Wave 5 for support which appears to have completed slightly early. An EBOT signal and bullish divergence in the 5, 35 Oscillator has taken shape into Elliott’s price zone but done so before entering the estimated time band of late June to late October for establishing a low. A daily chart W5 is also in play, but an EBOT above $23 is still well-removed from Tuesday’s price action.

For the bears, the technical prospects for a fade play into potential Fibonacci and down-channel resistance looks interesting but requires waiting. Should CHK continue to make good on its W5 set up and develop a counter-trend rally, a lower risk, higher reward entry could be available shortly.  

Option Activity

In Monday’s session and more than 137,000 contracts traded versus Chesapeake’s 50SMA of 32,000. The heavy action favored slightly puts with a put/call reading of 1.11. Of late, that’s typical of trader positioning in Chesapeake as expressed by the illustrated put/call ratio chart shown below and one which displays a good deal of trading above the 1.0 threshold favoring puts.

Figure 2: Chesapeake (CHK) Put/Call

If traders also take the time to examine open interest in May, June and July; it’s easy to see a preference for the put contract and synonymous, though not entirely correct, with bearish positioning. Most active Monday, the out-of-the money May 17 put saw volume of about 11,500 and compared to open interest of 34,000.

In a close second, the near-the-money June 18 put traded just north of 10,000 contracts versus open interest of 1,800. With the May contract inside of 20 days until expiration; rolling “to open” and maintain protection closer to the action with the June may have been one popular strategy.

In Tuesday’s early action and shares near 19.55, puts are trailing calls by a narrow margin with a put/call of 0.85. Favored thus far, 6,400 slightly out-of-the-money May 20 calls and 5,600 June 17 puts are showing the top concentrations of activity.

Digging a bit deeper, with implieds under modest pressure for a second straight session after striking three plus month trading highs, still elevated relative to both short and longer-term underlying / statistical volatility and shares attempting to rebound from a deep and lagging technical position; it’s likely the “targeted purchase” strategy is finding interest within Chesapeake’s well-traded puts.

In today’s most active June 17 put, 60% IV translates into a sale price of $0.58 for a targeted purchase position or put sale. This amounts to a return of about 3% compared to its share price and annualized net of 24% if shares remain above the 17 strike. The sale allows for a drop of 13% in CHK before possible assignment and hence, the so-called targeted purchase. A breakeven of 16.42 compares to Friday’s fresh three year lows of 16.78 and one which technically could be setting up as a three year double bottom.  

Expected Move

With CHK improving its intraday position to 19.96 and squarely on the 20 strike, the Weeklys May ATM straddle is fetching $1.22 and priced on 84% IV. In dollar terms, the delta neutral, curve position maintains break-evens of 18.78 and 21.22.

For more theoretical types interested in bell curve analysis and the concept of continuous hedging, current implieds tell us traders collectively expect a 1SD or 68% chance shares of CHK will remain within a slightly greater range of approximately 7.50% or 18.50 to 21.50 through expiration this Friday.

Expected move pricing of 7.50% is a bit stiffer than CHK’s most recent immediate post earnings reactions. However, a casual glance of the daily chart does show CHK’s knack for continuing to move rather than simply consolidate beyond that first session following its earnings announcement. And given a stock that’s been nearly cut in half over that same time frame, the crowd’s expectations for an outsized move seem a bit less so and maybe a bit more appropriate than otherwise.  

 


Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
Optionetics.com ~ Your Options Education Site
Visit Chris Tyler’s Forum
 
The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual. 

 


Recent articles by Chris Tyler, Optionetics.com


September 21, 2012  -  Wall Street's Friday Lunch Options
September 21, 2012  -  Hot Shots: All Aboard or Train Wreck?
September 20, 2012  -  Wall Street's Thursday Lunch Options
September 19, 2012  -  The Expected Move: Bed Bath & Beyond Earnings
September 19, 2012  -  Wall Street's Wednesday Lunch Options


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