Shares of Chesapeake Energy Corporation (NYSE:CHK) have been volatile over the past few months. In March, CHK stock was hovering near similar levels to today, before rocketing higher by 30% to $6.50. So what now?
Chesapeake Energy had a big one-month move, but now finds itself below the $5-level. It’s frustrating investors and making traders think twice.
Because of the move below that key level though, we are calling CHK stock a no-touch. But should it rally back to $5, a trade will emerge.
While Chesapeake Energy could be in an opportune spot soon, let’s also remember that it is not a low-risk play. In fact, most would consider it a high-risk stock.
A Fundamental Look at Chesapeake Energy
In fiscal 2014, Chesapeake had net income of $1.9 billion on $23.1 billion sales. The last two years? A net loss close to $19 billion of $20.6 billion in revenue — combined.
Worse, total assets plunged from $40.7 billion in fiscal 2014 to roughly $13 billion at year-end 2016. While assets took a nosedive, debt unfortunately did not. On the plus side, it didn’t swell either, falling to $10.4 billion in fiscal 2016 from $11.5 billion in 2014.
As of last quarter, total assets shrank even further, falling from $13 billion to $11.7 billion. But importantly, debt is improving. In just one quarter, total debt fell more than 8.5% to $9.5 billion from $10.4 billion.
While these numbers would scare most sane investors away, management has been making necessary changes to keep the business alive. After losing $4.18 per share in 2015 and $3.55 in 2016, analysts are looking for a turnaround. They expect earnings of 86 cents per share in 2017 on revenue of approximately $10 billion.
This would represent a 27% gain in year-over-year sales. And while sub-$1 earnings-per-share seems unimpressive, keep in mind CHK stock only trades for about $5. In 2018, analysts expect sales to gain another 11% to $11.1 billion, while earnings should improve over 30% to $1.13 per share.
This is assuming energy prices stabilize and don’t collapse back toward the lows. If Chesapeake Energy can operate its business in a stable or rising oil and gas environment, shares have upside.
The fact is, CHK stock is trading off last year’s results and understandably so. But on a forward analysis, Chesapeake is looking the best it has in over a few years.
Trading CHK Stock
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As of last quarter, Chesapeake Energy had 75% of its remaining gas production hedged at $3.05 per mcf. That’s in addition to the 64% of oil production hedged at $50.25 per barrel.
It’s likely that those percentages are even higher now.
That should help with stability in Chesapeake’s business, but how do we trade CHK stock? Fortunately, that’s the easy part.
This is not a buy-and-hold forever stock. In fact, this is very much a trade or in the very least, an investment with a short leash. That is, assuming CHK stock can move back above $5, which it needs to do in order to be a buy.
The $5-level was a big area of support over the last few months. More so, it has been an important support and resistance level over the past few years.
As oil prices go, so goes Chesapeake. Given crude oil’s fall, that doesn’t bode well for CHK, as shares are now floating below $5. Until it can get back above that level, we don’t want to own it.
On the plus side though, this is a great level because it allows traders a great risk-reward profile. If and when CHK stock eclipses $5, investors can buy the stock for a high-reward/low-risk setup. Why? By using a stop-loss just below $5, investors will have minimal losses should that level fail as support. It then allows them to be long in the event of a rally.
Even a move back to just $6 would represent a 20% gain. A stop-loss of $4.75 would be a loss of less than 5% given current prices. Again, this is a clearly defined level that allows investors to take a measurable risk with CHK stock.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held no positions in any security mentioned.
