The last time I wrote about Chesapeake Energy Corporation (NYSE:CHK) it was fighting to reach $5 per share.
Our Richard Saintvilus had called $5 “an important psychological benchmark” but I wrote that it was a stock only fit for gamblers, being among the “dead men drilling” in the oilpatch, overburdened with debt.
Since then the shares have been on a wild ride. You could have lost 10% on that $4.84 per share Chesapeake investment within days after I wrote, or you could have caught that $4.43 per share low and made 10%, at a peak of $4.96. Right now, you’d be down about 5%, with shares at $4.61.
Chesapeake was a great name in the early part of the decade’s shale boom. The name sits on Oklahoma City’s basketball arena and carries positive associations for former Beatle Paul McCartney, who played a sold-out show there last week.
For investors, not so much.
Pounding the Table
Despite Chesapeake being down over 30% for the year, facing fierce resistance with every small bull move for two years now, there are still people pounding the table for the stock.
Technician Chris Tyler writes “don’t be scared” of the debt, insisting you can make money in the stock. He is right. If you time your trades right, getting in at a low and out at a short-term high, or use options, you can make money in Chesapeake Energy.
That doesn’t make it an investment. That makes it a trade.
When the company reports earnings Aug. 3, analysts are expecting Chesapeake to earn 14 cents per share on $1.08 billion in revenue, and they’re hoping for 16 cents. That would double the earnings of the previous quarter, as the company continues to seek buyers for its assets.
But that’s half the revenue of the March quarter. This is a shrinking company, yet some still write breathless stories saying you should “buy now.” Why? The company continues to spend $1 billion per year just to keep up production, because fracked wells depreciate quickly, and the hope in the stock involves asset sales, re-engineering the balance sheet or finding big production in locations other drillers no longer like.
The fact remains, as I wrote in May, that Chesapeake remains hostage to oil prices. Those prices are up over the last month, but the overall trend remains negative, because there producers continue to engage in regional wars, or they are seeking to pay down debt.
Renewable energy, especially efficiency, retains its thumb on the price scale, and that thumb is only going to get heavier with time.
Where to Profit from CHK Stock
There are some traders who have made good profits in Chesapeake. It’s those who own the thinly traded preferred stock, CHK-PRD, which was supposed to be called in 2010 but still trades. The shares sport a yield of 8.3%, a conversion price of $44.17, and have doubled in value over the last year.
But even the preferred stock has been generally falling in price since January. That’s why the yield is so high. A low price with a constant dividend always brings a stock’s yield up. It’s a thinly traded security that will be hard to find, and hard to sell once you get it.
But it’s where the money is.
The Bottom Line
For me, Chesapeake is a bit like Sears Holdings Corp. (NASDAQ:SHLD), a nostalgic symbol of another day that is only going to make money for insiders who are wheeling-and-dealing on the remaining assets.
If you want to bet on the price of oil, go with a highly capitalized market leader like Pioneer Natural Resources (NYSE:PXD) or EOG Resources Inc. (NYSE:EOG). Both are down for the year, but if oil does get to $60 per barrel you will be getting the profits, rather than the bondholders or the preferred stock holders.
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 article.
