2017 is not shaping up to be too good for long-suffering Chesapeake Energy Corporation (NYSE:CHK) shareholders. After regaining some of its long-lost mojo throughout 2016, CHK has spent much of the new year trending downward on the back of the recent oil and natural gas collapse.
Today, Chesapeake Energy is awfully close to technical penny stock territory of $5 per share. That drop and return to such a low share price has plenty of investors willing to give up on shares of CHK stock. After all, we’ve been down this road before with Chesapeake.
However, this is not a case of history repeating. Today’s CHK is not like the debt-bloated, plodding behemoth of yesterday. These days, Chesapeake Energy is vastly different, and the drop in price could be seen as a big-time buying point for investors.
Is CHK stock risky? Yes. But this time the risk really is in investors favor.
What Happened to Chesapeake Energy?
For Chesapeake Energy, the story over the past few years has been about its cash flows. More specifically, the strength and amount of those cash flows to cover its massive debts and interest payments.
If you remember, CHK incurred large debts during the previous oil boom, so it could expand into new shale formations and grow to be one of the biggest frackers in North America. Covering those debts became a problem over the past few years, as oil prices collapsed. CHK was truly on the verge of packing it up and potentially filing for bankruptcy.
And then, the natural resource gods smiled on Chesapeake Energy and prices bottomed. Since then, CHK’s cash flows have expanded, and the firm has used its excess cash and money from asset sales to pay down its debt. Heck, CHK even managed to squeak out a small profit last quarter thanks to higher energy prices.
And then the bottom dropped out — very fast.
The overall warmer-than-expected winter has sent natural gas prices plummeting. Since the start of the year, spot prices for natural gas has sunk by roughly 30%. The problem is that those lower prices come at just the wrong moment for CHK and its fracking sisters. Higher prices for both natural gas and crude oil has caused the frackers to start ramping up production once again. Now supplies had overtaking demand and driven down prices.
It’s also driven down Chesapeake Energy stock by more than 14% since February.
And a significant part of that decline is that the firm’s cash flows- which have been propelling CHK’s debt initiatives/payback- will now suffer. So much so, that yields and credit default swaps on Chesapeake Energy bonds have spiked to their highest levels in years. Meanwhile, yields on the firm’s bonds have started to approach double digits. Bond investors have once again begun to worry about the company’s balance sheet and its ability to function on its own.
What’s Different Now for CHK
The thing is, today’s CHK isn’t the problem kid of the energy world it used to be.
It’s debts, while still high, are manageable, having spent the latter part of three years seriously reducing that number. As of the end of 2016, Chesapeake’s outstanding debt stood at $10 billion.
But that number has already dropped by just $900 million, and the energy company only has around $77 million or so worth of debt maturing over the next two years. This is a far cry from the $20-plus billion that Chesapeake Energy had outstanding at its peak.
There’s no bankruptcy risk here.
Secondly, CHK is a much more “leaner and meaner” energy producer. The firm has slimmed down successfully and is only focusing on the most profitable/productive operating areas and assets. This includes selling non-core areas as well as improving ist drilling technology to reduce capex costs.
What this does is enhance its profit picture and boost operating margins. That’ll help CHK survives the current hiccup in a much better shape than the last downturn.
Chesapeake Energy Is a Steal Under $5
So what does this really all mean? In a nutshell, CHK stock at $5 today is a steal when compared to compared to CHK at $5 a few years ago.
Yes, the firm is still a relatively risky bet when compared to someone like Exxon Mobil Corporation (NYSE:XOM), and is mainly driven by the price of oil/natural gas. However, the risks seem particularly muted this time around. Its debts are lower and manageable, and CHK is better equipped to make money at lower energy prices.
It’s why Wall Street expects CHK to make 66 cents per share in profits this year. Even if the current price hiccup changes that slightly, Chesapeake Energy Corporation should still be a profitable company over the course of the year.
At its current $5 per share price, investors willing to do a tad bit of gambling should have the odds in their favor.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
