It’s amazing just how far many energy stocks have fallen in the wake of sustained, low crude oil and natural gas prices.
Just look at natural gas superstar Chesapeake Energy (CHK).
CHK has been obliterated in the past year as natural gas continues to dip lower and lower. Profits are non-existent and shares of the once-mighty shale driller have plunged roughly 75% since the start of the year.
And while you may be tempted to snag shares of CHK for the rebound, the truth is that it may not be a bargain at even that rate.
Right now, Chesapeake looks like a dead stock walking.
Look at CHK Bonds
Chesapeake’s problems have always been about debt. When former CEO Audrey McClendon first founded the company, he used debt — and a lot of it — to expand into more and more shale fields. The firm acquired acreage by the fistful and Chesapeake became the natural gas giant we know it as.
The debt was never really an issue when natural gas prices were still relatively high. For the most part, CHK was still pretty darn profitable and the continued production gains helped keep those profits humming.
Then prices for natural gas tanked.
After kicking McClendon to the curb, Chesapeake was able to fill its cash crunch with mega-asset sales, spinning off its drilling arm as Seventy Seven Energy (SSE) and slashing the CHK stock dividend to zero. The asset sales helped tremendously — CHK stock was able to find plenty of buyers for some of its mondo-sized acreage positions.
Meanwhile, CHK took some of the cash it raised and plowed heavily into crude oil drilling in order to offset falling natural gas prices. Normally, that would be great as crude oil prices have been pretty resilient in the face of the lower natural gas. However, today isn’t normal, and we have a major glut of oil in the markets that isn’t going away anytime soon.
So with both natural gas and crude oil in the dumps, that hefty debt load — roughly $17 billion — at CHK is starting to look pretty darn scary. It looks even worse considering the firm was recently required to write-down the value of its reserves. Today, the amount of natural gas and oil CHK has in the ground is only worth about $4.2 billion. That’s down from $22 billion last year at this time.
CHK stock now has a major problem, as its debt is now four times greater than amount of fuel it has in the ground. How in the heck is it going to pay its debts?
Well, its bond holders don’t think it’s going to be able to — not without a miracle, anyway. The firm’s bonds have plunged all the way down to 50 cents on the dollar. Some have even plunged further than that. Bloomberg reports that Chesapeake’s “$700 million of 5.375 percent unsecured notes due 2021…[fell to] 41 cents,” and $1.5 billion of floating-rate notes due 2019 can now be purchased for 46 cents on the dollar. At the same time, the cost to insure CHK’s debt via credit default swaps has surged 5.5%.
CHK is going to have a very, very hard time using its cash flows to pay for previously signed contracts, debt and normal capex spending. That 50 cents or so on the dollar amount for its bonds is basically saying “bankruptcy risk is very real for CHK stock” Maybe it’s not imminent, but it’s real possibility for the shale producer.
Run, Don’t Walk Away From CHK Stck
Unless crude oil and natural gas suddenly surge in price, Chesapeake is going to have a very non-merry holiday season and New Year. Bloomberg shows that CHK stock will burn though its pile of $1.8 billion in cash in about 7 months. And while the company does have $4 billion available under a credit facility, many banks are reevaluating those liens of credit as oil prices have plunged. Using that as a back-stop, and taking on more debt in the process, isn’t a great idea for the firm.
With debt/bonds issues of $396 million, $500 million, $2.2 billion, $1 billion, and $1.5 billion coming due all within the next few years, the possibility of bankruptcy or a fire sale at CHK is growing every day.
Where does that leave CHK stock investors? Hopefully, running for the exits.
CHK stock is just too risky at this point for a real investment. If you think you can trade it, go ahead — it should rise/fall with every bit of good/bad news. But as a buy for the eventual rebound in crude oil and natural gas prices? No.
The mounting debt loads and dwindling cash flows at the firm are signaling trouble with a capital T. CHK might not be here when that rebound happens. The bond market is usually pretty good at predicting just how in trouble a firm is. The fact that Chesapeake bonds trading are at 50 cents on the dollar is a huge warning sign.
At the end of the day, CHK stock is only a trade at this point. Serious retirement money should be placed somewhere else.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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