It’s been a long, long past couple of years for Chesapeake Energy Corporation (NYSE:CHK) shareholders. While CHK stock is well up since the beginning of last year, it’s still down more than 80% since its mid-2014 peak, and the natural gas behemoth is still booking losses on a regular basis … and not small losses either.
Nevertheless, last quarter’s loss of 84 cents per share was much narrower than the previous year’s Q4 loss of $3.47 per share of CHK stock, suggesting that if nothing else, Chesapeake Energy is on the right trajectory.
Problem: Since the end of its most recently reported quarter, the price of natural gas has fallen nearly 18%, and is down 26% since its December peak, pulling the rug out from underneath a rally many Chesapeake investors — as well as shareholders in rivals like Cabot Oil & Gas Corporation (NYSE:COG) and Antero Resources Corp (NYSE:AR) — were counting on.
Is there any hope Chesapeake Energy will be able to reach takeoff speed with gas prices seemingly stuck in a rut? Probably not, but there’s one glimmer of hope … although, it’s a high-risk maneuver.
Can’t Win for Losing
Just when it looks like natural gas prices might break out of a rut and start to edge meaningfully higher again, gravity kicks in again.
Click to Enlarge Take a look at the adjacent chart of natural gas prices (U.S.). With crude oil, natural gas appeared to make a pivot on February of last year. Unlike oil, though, that uptrend imploded beginning in early February.
And the future doesn’t look especially bright either. As of the most recent report. The U.S. Energy Information Administration projects natural gas prices to average $3.55 per MMBtu this year, and only rise to $3.73 per MMBtu next year, on average.
That is better than the current price of gas: 21% and 27%, respectively. That’s just not enough for Chesapeake Energy to turn a decent profit. Indeed, the company hasn’t turned a real profit in years.
Click to Enlarge See, Chesapeake Energy became the company it is today based on the trajectory of natural gas prices seen in the early 2000’s. Problem is, that gas rally was anomalous, and unsustainable. Natural gas prices have been in a secular downtrend, with no end in sight.
If CHK stock is ever going to be worth owning again in the foreseeable future, it’s not going to be on the heels of a natural gas rebound. There’s still a fighting chance, however.
A Long-Shot (and Long-Term), Go-for-Broke Bet
When Doug Lawler replaced Aubrey McClendon as CEO of Chesapeake Energy back in May of 2013, it was no real secret he loved the idea of adding crude oil to the company’s mix.
As it turns out, the market should have been reading between the lines since then.
Last month, Lawler revealed he’s allocating 60% of the company’s spending to crude oil prospects, taking Chesapeake Energy into a market where it has no real experience or market share. Most of that allocation will be invested in South Texas, Oklahoma and Wyoming.
It’s not a bad use of funds, for the right project. In terms of energy equivalency, crude is more than three times as valuable as natural gas is. As Wunderlich Securities analyst Jason Wangler explained after Lawler shed a major property, the Barnett Shale, “Now they have room that will allow them to deploy capital to higher-return [oil projects].”
Click to Enlarge And there’s no denying oil prices are holding up a lot better than natural gas prices are, remaining within reach of another bullish leg en route to a major rebound effort.
Bottom Line for CHK Stock
It’s certainly a step in the right direction. But, it’s only one small step; hundreds more will be needed if Chesapeake Energy is to ever fully dig itself out of a hole, which is not only an operational one, but a debt-laden one.
CHK stock may never actually get over the hump if natural gas doesn’t take a significant turn for the better, and if the company can’t find the right oil projects. The realistic outlook isn’t a terribly hopeful one.
Still, the turnaround effort is sure to be one worth watching. There’s always a chance.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.