Much like the weather in [insert your state here], if you don’t like the expectations for — and from — Chesapeake Energy Corporation (NYSE:CHK), just wait five minutes ’cause it’ll probably change.
Case in point: Earlier this month, TheStreet.com’s Shubhankar Adhikari cited three reasons why 2017 could be an encouraging one for owners of CHK stock, but as of the end of March, Forbes contributor Great Speculations (part of the Trefis Team) suggested this year may be a less-than-stellar one for Chesapeake Energy.
Trefis noted a looming increase in capital expenditures and a weak oil environment as a potential drag on CHK, while Adhikari touted the potential sale of some of the company’s assets as a source of funding … if the need arises.
If the two ideas seem at odds with one another, you’re not crazy — they are in conflict. Planning a sale of properties is the exact opposite of investing more in your assets.
Thing is, the mixed messages are par for the course, and nothing new to investors. That may be why CHK shares have been all over the map since late 2015, but haven’t made any net progress higher or lower during that time.
It all begs the question … what does the future actually hold for this oil and gas giant, and what do traders need to watch most closely?
Key Drivers for CHK Stock
All companies are multi-faceted, and Chesapeake Energy is no exception. Indeed, it — along with most energy names — has dished out more than its fair share of drama since oil’s peak back in 2014. With the dust finally starting to settle though, we can get a clearer picture of what’s going to push and pull CHK more than other matters in the foreseeable future. They’ll all be plenty familiar with anyone who’s been following the saga of crude oil since 2014.
Debt
The good news is, Chesapeake Energy was able to push back the bulk of its near-term maturities, with some of them delayed as much as a decade. This will give the organization at least a few years to recover, and (hopefully) give the oil and gas market some time to level out at better prices. Nevertheless, $9.9 billion worth of debt against a backdrop of $7.8 billion worth of annualized revenue isn’t exactly healthy.
Operational efficiency
While falling crude prices hurt all energy companies and the 30% rally from oil over the last twelve months has helped them, for current and would-be Chesapeake investors, this isn’t just an oil-price bet. Even stripping out the impact of asset sales, 2016’s production of oil and equivalents was off by 7%. The company is going to have to get more out of its assets.
Oil and gas prices
While the price of oil and gas isn’t the only matter weighing in on CHK shares, it is still the biggie. And interestingly, thanks to a lot of cost-cutting work, its production costs are now lower than those of rivals like ConocoPhillips (NYSE:COP) and Apache Corporation (NYSE:APA). It has become so cost-effective, in fact, that it’s more profitable now with oil trading around $50 per barrel than the company was back in 2014 when crude prices were in excess of $100 per barrel. If oil continues to rise, it could result in an oversized benefit to Chesapeake Energy.
The X-Factor … Doug Lawler
With all of that being said, perhaps it would be easier to sum up the precarious for CHK stock right now by pointing out how well CEO Doug Lawler has found the balance between managing debt and bearing fruit since he took the helm in mid-2013.
Giving credit where it’s due, the Financial Times’ Ed Crooks nailed it a couple of days ago when he characterized Lawler’s tenure with Chesapeake Energy by explaining “while Mr Lawler may have been managing the equivalent of walking a tightrope while balancing a full tea service, analysts warn that he has not yet made it safely to the other side.”
The “not yet made it safely” qualification is a nod back to the massive debt former (and now-deceased) CEO Aubrey McClendon saddled the company with in his quest to turn nothing into something. McClendon was into shale before shale was cool.
It was a fun ride, with the company pretty much setting the stage for the rise of shale gas. But, it was hardly a cheap one. That $9.9 billion worth of debt Chesapeake Energy is currently sitting on used to be $21.3 billion as recently as 2012, though in retrospect, the company has never had enough to show for that spending. It was always built and based on a future that assumed oil and gas prices would never retreat. Now we know better, but it may be too late.
If anyone can navigate CHK stock out of trouble though, Lawler seems to be the man for the job. It’s just not clear if anyone is capable of doing so.
Bottom Line for Chesapeake Energy
If nothing else, seeing the turnaround effort from Lawler and the company following a somewhat reckless expansion effort from McClendon has been entertaining. The dust is starting to settle though. There’s only so much additional operational efficiency you can wring out. There are a limited number of properties you can cull before you crimp your ability to generate revenue. If Chesapeake Energy isn’t there yet, it’s close, but it doesn’t appear to be enough.
Never say never. Lawler may have a few more tricks up his sleeve and oil/gas prices may well continue to edge higher. That said, there are plenty more promising bets out there than CHK, even within the energy sector.
Or, look at it like this … there’s a reason the usually bullish analyst community can still only muster a collective “Hold” rating on Chesapeake Energy, despite the fascinating story behind the company. Those same analysts are watching the same factors described above, searching for some sort of change or insight that has yet to surface.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
