Why Chesapeake Energy Corporation (CHK) Stock Isn’t Coming Back Soon

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If today is a day ending in the letter “y,” you will likely find someone yelling into the wind that Chesapeake Energy Corporation (NYSE:CHK) is a screaming buy. The company made $75 million, 8 cents per share, during the March quarter, and analysts are expecting that to double, to 15 cents, when it next reports earnings Aug. 3, they will whisper. Doesn’t that sound good for CHK stock owners?

Why Chesapeake Energy Corporation (CHK) Stock Isn't Coming Back Soon

No, it doesn’t, when you look at Chesapeake’s balance sheet, and its longer-term prospects.

CHK has been followed avidly by amateur investors for many years. Interest peaked during the fracking boom early this decade, when swashbuckling founder Aubrey McClendon helped solve the Northeast’s energy crisis with cheap natural gas from Pennsylvania’s Marcellus Shale. Upon cracking the shale with high-pressure mud, the gas flowed, turning a shortage into a glut, and making the U.S. an energy exporter again.

That was then. This is now. Chesapeake is not yet a dry hole, but the profits are not coming back, no matter how much its boosters may will that to be so.

The Gas Glut Killed It

There is such a thing as too much of a good thing, especially in the oilpatch.

Natural gas prices spiked to over $6 per mcf in 2014, but then fell, to as low as $1.78 per mcf in 2015. They have recovered since, to about $3 per mcf. 

CHK, however, has not. McClendon died last year in a single-car accident, Chesapeake’s dividend was cancelled in 2015 and did not return, and the company has been on a slow slide toward irrelevance ever since.

The financial problem is similar to what caused Valeant Pharmaceuticals Intl Inc (NYSE:VRX) to roll over, debt. McClendon built his empire on borrowed money and when prices turned the company found itself with a burden it has yet to shake. As of March, the company had $11.69 billion in assets, but $9.50 billion in long-term debt. Yet for some reason, CHK stock still has a market cap of $4.5 billion.

The Price Mystery Solved

InvestorPlace contributor Richard Saintvilus recently called $5 per Chesapeake share “an important psychological benchmark” the company was fighting to get over, and as this was written, it remained short of the mark.

The reason is oil prices. Oil is down 20% from its January highs, it presently hovers around $45 per barrel and while traders are expecting big moves they don’t know which direction the moves will be in.

That’s because each time oil looks set to rebound, debt-ridden oil companies lock-in the higher price with options, and go back to pumping. Companies like CHK are now called “dead men drilling” for just this reason. They can’t turn a profit, but they can’t go out of business either. They’re being run at the behest of bankers trying to get their money back.

American producers aren’t the only ones in a cash crunch. Libyan and Nigerian producers seem to be ignoring the production curbs they previously agreed-upon. OPEC has increased production recently, but demand for gasoline is falling, not just in the U.S., but in Asia as well. Efficiency, the cheapest form of renewable energy, is putting a thumb down on prices.

Bottom Line on CHK Stock

My bottom line on Chesapeake and companies like it agrees with other InvestorPlace writers’ advice. Joseph Hargett writes simply, give up. Will Ashworth says you should leave it to the traders. 

Volatile oil prices mean there will remain action, both in the commodities and in the stocks involved, and CHK stock is part of that action. But unless you’re a gambler, and can afford to lose your money, this is not the kind of game you want to be playing. Personally, I’m investing for retirement, and I’m going to stay with trends that have legs, rather than oil’s cycle of boom and bust.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, 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 story.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/chesapeake-energy-corporation-chk-stock-isnt-coming-back/.

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