It’s looking as if Chesapeake Energy Corporation (NYSE:CHK) stock won’t make the turnaround investors expected. Aside from falling oil prices, CHK stock has been burned from the massive levels of debt the company has accumulated, which seems to keep the prospect of bankruptcy always one mistake away.
Chesapeake Energy stock has been crushed, falling as much as 19% in three months, while plunging as much as 32% since reaching its 2017 high of $7.32 on Jan. 3.
CHK: Between a Rock and Hard Place
CHK stock closed Wednesday at $5.29, down more than 3%. The shares are down 24% year-to-date, trailing the 6.7% rise in the S&P 500 index and the 9.5% decline in the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE).
Indeed, Chesapeake Energy stock is not alone in its struggles, but with a net debt position of around $9 (as of the most recent quarter), the Oklahoma City-based natural gas company not only presents tons of risks, but unlike some of its peers such as Murphy Oil Corporation (NYSE:MUR) or Cheniere Energy, Inc. (NYSEMKT:LNG), Chesapeake is more reliant upon higher oil prices.
To be sure, CEO Robert Lawler has done a decent job managing the company’s cash flow, which had moved to negative territory under former CEO Aubrey McClendon. And in fairness, the company’s liquidity crisis is not as dire as it were, say, a year ago. But with natural gas prices still under pressure, there continues to be heightened fear that Chesapeake Energy may default on its debt obligations.
The reason for the concern stems from the company’s projected 2017 output, which it forecasted to be 10% higher year-over-year. Plus, CHK planned to increase its 2017 capital expenses by almost 30% (midpoint), based on its target spending range of $1.9 billion to $2.5 billion. Declining oil prices have thrown a wrench into those plans. Yet, analysts are projecting the company in fiscal 2017 to deliver double-digit revenue growth.
And based on fiscal 2018 sales estimates of $10.81 billion, Wall Street has priced in another double-digit growth next year. CHK, however, needs gas prices to rise to allow it to generate enough cash flow to finance what still seems as an aggressive capital expenditure plan. In addition to higher gas prices, Chesapeake will need to dispose of valuable assets to fuel liquidity. But without these assets, which it needs to deliver output, revenue will be hard to come by. All told, Chesapeake Energy and CHK stock are stuck between a rock and hard place.
Bottom Line for Chesapeake Energy stock
Investing in this natural gas and oil exploration stocks had been risky for the past couple of years, given that little has been known about the direction of oil prices. In the case of Chesapeake, there are too many “if” scenarios to rely on to remove the risks of default from CHK stock.
If the recent declines weren’t bad enough, the opportunity cost of losing on better prospects magnifies the risk.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.