Since I last wrote about Chesapeake Energy Corporation (NYSE:CHK) about one week ago, CHK stock fell sharply then spiked almost 10%. Two words are behind the rise: Saudi Arabia.
The decision by the kingdom to keep cutting production is boosting oil prices, which stood at $48.13 for West Texas Intermediate, the standard U.S. grade, and $51.07 for the European Brent type, as trading opened on May 11.
The magic number is $50. If producers can get $50 for a barrel, either directly or through hedging, they can make money in major Texas fields like Eagle Ford, where there is ample infrastructure for getting oil to refineries. Seeing that price on the board, and under the pressure of debt, oilmen are increasing rig counts, delivering more product and paying down their loans.
Chesapeake is part of the trend. The company had earnings of $75 million, 8 cents per share, on revenue of $2.75 million for the first quarter, allowing it to increase its share count and improve its balance sheet, paying down nearly $1 billion in debt.
Can It Last?
Our James Brumley thinks the recovery can last, and if it does Chesapeake should be a buy. He says the company is succeeding in cutting costs, that it should be able to produce 100,000 barrels per day by the end of the year and that it should be able to make money on that production.
Goldman Sachs Group Inc (NYSE:GS) also believes in the oil turnaround. The company’s head of commodities trading recently said prices should be firm throughout 2017, and that the cash market is where to be, as there remain fears of a future glut that are holding futures prices down. The International Energy Agency also sees demand exceeding supply for the current quarter.
Thus, while the initial reaction to Chesapeake’s first-quarter earnings was negative, a week of trading has brought the stock back to the $5.80 per share level, which is about where it opened today.
CHK Stock Is for Traders
While the first quarter was termed “quiet,” Chesapeake stock has recently become volatile. Traders are using it as a proxy for oil prices. The stock’s technical moves look bullish and it went up sharply upon news that U.S. oil stockpiles fell last month.
The drawdown of five million barrels told traders that the Saudi production cuts are finally having the desired impact on the market and that higher prices can be sustained over the near term, justifying the recent rise in rig counts.
As our Richard Saintvilus has written, however, there remain many “ifs” in the Chesapeake investment case, as opposed to its trading case. Higher prices must continue so Chesapeake can further reduce debt by selling assets. The company has declared its Wyoming production in the Powder River Basin profitable, possibly in hopes of attracting a buyer.
Over the long run of five years, which is how I invest, I believe oil is in a losing race against efficiency, which along with renewable energy supplies is going to hold down demand and prevent oil from seeing the boom it saw early in the decade.
This does not mean that traders can’t profit on short-term swings, and Chesapeake stock remains a good, liquid proxy for that. But if you like long vacations with a cool drink or prefer to only check your stock holdings every year or so, I wouldn’t buy CHK stock.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
