Investment Analysis and Recommendation
Using the information on the proxy statement:
� Evaluate the monitoring potential of the firm’s Board of Directors.
� Identify the strengths and weaknesses of how the board is structured, as well as any ethical concerns.
Write a 1-page summary of your findings.
INVESTMENT ANALYSIS AND RECOMMENDATION 2
Investment Analysis Paper on Chesapeake Energy Corporation
Chesapeake Energy Corporation is U.S based utility company dealing in natural gas
exploration and production. The company is headquartered in Oklahoma City, OK and employs
approximately 10,800 people (as of December 31, 2013). The company was incorporated in 1947
and has evolved to be a leader in the energy sector worldwide with over $7.4 billion in total
assets (as of December 31, 2014).
Board of Directors
The board of directors is very important to the organization since they determine the
direction to be taken by the business. The board of directors is composed of a ten member team;
nine of the ten are independent members. Each of the nine sits in a charter committee namely;
audit committee, compensation committee, nominating committee and finance committee. The
Chair to the Board is a member of nominating committee and finance committee.
Monitoring Potential of the Firm’s Board of Director
The strategic monitoring potential of the board is derived from the fact that 90% of the
members have complete autonomy and sits on committees (MarketLine, 2014). The charter is
also governed by constituency statutes that permit them to make decisions in favor of the
company rather than the shareholders’ interests (Brian et al, 2013).
Strengths and Weaknesses of Board Structure
Intense market competition and structuring of the board might either erode or increase the
company’s market share. This board strength and weaknesses include:
INVESTMENT ANALYSIS AND RECOMMENDATION 3
Strengths Weaknesses
Mainstream on vertical integration
Strong market position based on personnel
High debt resulting from heavy borrowing
Opportunities Threats
Increasing demand for natural gas in the
world and key employees
Increasing competition
Legal compliance and changing gas prices
Ethical Concerns
The company lacks appropriate responsiveness to the shareholders concerns. This is
because the directors have full autonomy over decision making. Despite the fact that their
position is backed up by the constituency statutes, it amounts to lack of transparency in the
overall organization (Bundy & Ann, 2013).
INVESTMENT ANALYSIS AND RECOMMENDATION 4
References
Brian, J. H, Sandra, M. T. & Jennifer, C. H. (2013). Benefit Corporation Concerns for
Financial Service Professionals. Journal of Financial Service Professionals. 74-82.
Bundy, J & Ann, K. B. (2013). Strategic Cognition and Issue Salience: Toward an Explanation
of Firm Responsiveness to Stakeholder Concerns. Academy of Management Review. 38 (3)
352-376.
Chesapeake Corp. (2015). Company Profile: Chesapeake Energy Corporation. MarketLine
INVESTMENT ANALYSIS AND RECOMMENDATION 5
DuPont Analysis for the companies for the past three years
Return on Investment (ROE) is the is one of the most important company analysis tools that is
used to measure how well a company manages and creates value to their shareholders. However, the
values on the ROE can sometimes be misleading in terms of real value and risks associated with a
particular investment. The numbers in the ROE can easily be misleading to financial analysis if the
individual components of the ROE have not been broken down to their individual components. In this
regard, DuPont can bridge the gap created by the ROE and provide a reliable measure of how the
company creates value for its shareholders (Mitchell, Mitchell, & Cai, 2013). DuPont is the financial
analysis tool that enables the breakdown of the ROE into its various individual components such as
financial leverage, asset turnover, and profit margin (Haskins, 2013). The following is the financial
calculation of DuPont of Chesapeake Energy Corporation, together with their competitor, Anadarko
Petroleum Corporation (APC) (Cheasapeake Corp, 2015).
DuPont takes utilizes the basis of the individual component of ROE which is given by;
Profit Margin X Asset Turnover X Leverage Factor
Chesapeake Energy Corporation (CEC) Financials for the past three years
2014 2013 2012
Total Assets $40,751,000 41,782,000 41,611,000
Shareholders’ Equity $16,903,000 15,995,000 15,569,000
Revenue $20,951,000 17,506,000 12,316,000
Net Income $1,917,000 724,000 769,000
INVESTMENT ANALYSIS AND RECOMMENDATION 6
Anadarko Petroleum Corporation (APC) Financials for the past three years
2014 2013 2012
Total Assets 61,689,000 55,781,000 52,589,000
Shareholders’ Equity 19,725,000 21,857,000 20,629,000
Revenue 18,470,000 14,581,000 13,411,000
Net Income (1,750,000) 801,000 2,391,000
In the year 2012;
The DuPont for Chesapeake Energy Corporation is given by
Net Profit x Asset Turnover x Leverage Factor
(769,000/12,316,000) x (12,316,000/41,611,000) x (41,611,000/12,316,000)
= 0.0624 x 0.256 x 3.379 = 0.054
The DuPont for Anadarko Petroleum Corporation (APC) is given by
(2,391,000/13,411,000) x (13,411,000/52,589,000) x (52,589,000/20,629,000) =
=0.1783 x 0.255 x 2.541 = 0.116
In the year 2013;
The DuPont for Chesapeake Energy Corporation is given by
(724,000/17,506,000) x (17,506,000 / 41,782,000) x (41,782,000/15,995,000) =
0.041 x 0.419 x 2.612 = 0.045
The DuPont for Anadarko Petroleum Corporation (APC) is given by
INVESTMENT ANALYSIS AND RECOMMENDATION 7
(801,000/14,581,000) x (14,581,000/55,781,000) x (55,781,000/21,857,000) =
0.055 x 0.21 x 2.55 = 0.029
In the year 2014;
The DuPont for Chesapeake Energy Corporation is given by
(1,917,000/20,951,000) x (20,951,000/40,751,000) x (40,751,000/16,903,000) =
0.091 x 0.514 x 2.411 = 0.113
The DuPont for Anadarko Petroleum Corporation (APC) is given by
(1,750,000/18,470,000) x (18,470,000/61,689,000) x (61,689,000/19,725,000) =
0.095 x 0.299 x 3.127 = 0.089
Differences and trend that emerge
In the year 2012, the operating efficiency of APC (0.18) was higher than that of CEC (0.06) as
can be seen in their profit margins. In the same year, it can be deduced that the asset use efficiency of
between the two companies are almost the same since they stood at 0.255 for APC and 0.256 for CEC.
On the other hand, the financial leverage for CEC was higher (3.4) than the financial leverage for APC
(2.5).
In the year 2013, the operating efficiency of APC (0.05) was still higher than that of CEC (0.04).
In the same year, the asset use efficiency of CEC was higher than the asset use efficiency of APC.
Similarly, CEC had a higher financial leverage in the year 2013 than APC. Overall, it can be deduced that
CEC performed better than APC in the year 2013.
In the year 2014, the operating efficiency of APC (0.095) was higher than that of CEC (0.091).
However, the asset use efficiency of CEC stood higher (0.5) than that of APC (0.3). On the other hand,
APC had a higher financial leverage (3.1) than CEC (2.4) as can be deduced from the financial
INVESTMENT ANALYSIS AND RECOMMENDATION 8
calculations. The higher the financial leverage, the better a company is placed to provide good value for
its shareholders (Brian, Sandra, & Jennifer, 2013).
INVESTMENT ANALYSIS AND RECOMMENDATION 9
References
Brian, J. H, Sandra, M. T. & Jennifer, C. H. (2013). Benefit Corporation Concerns for
Cheasapeake Corp. (2015). Company Profile: Chesapeake Energy Corporation. MarketLine
Financial Service Professionals. Journal of Financial Service Professionals. 74-82.
Haskins, M. E.(2013). A decade of DuPont ratio performance. Management Accounting
Quarterly, 14(2), 24-33.
Mitchell, T., Mitchell, S., & Cai, C. (2013). Using the DuPont decomposing process to create A
marketing model. Journal of Business & Economics Research (Online), 11(11), 485.
