Every once in a while, investors are given a treat; a stock trading under $10 that’s unloved and under-followed, but worthy of your hard-earned investment savings. Chesapeake Energy Corporation (NYSE:CHK) is not that stock.
Currently trading for less than $5, CHK stock is a ticking time bomb of volatility that only a trader could love.
In my most recent article about the company, I highlighted several reasons I thought CHK stock is far too risky for the average investor. Let me revisit them.
Too Much Debt
As of the end of March, CHK had $9.5 billion in long-term debt and $249.0 million in cash, for net debt of $9.2 billion or 2.2 times market cap. That’s way too much for the average investor to bear.
So, the company went out and issued another $750 million in 8% debt (due 2027) and used the proceeds to buy back $681.8 million of its 8% debt due 2022. It added $68.2 million in debt to push some of it out by five years.
As leveraged as it is, that’s not a wise move. It might buy you more time, but it’s piling on to the problem, not solving it.
Bankruptcy Still in the Cards
Following on the previous point, Chesapeake Energy is pushing the debt ball farther down the road so it can stay out of bankruptcy jail.
The company’s Altman Z-Score was well into negative territory, suggesting bankruptcy proceedings within the next 24 months is possible. Since then, the analyst estimate for 2017’s earnings improved by 14 cents to 85 cents, with the 2018 number dropping four cents to $1.14.
If these estimates stay the same or move higher, than bankruptcy is probably off the table.
However, if oil prices keep moving backward, as they are at the moment, it’s possible the estimates could get revised downward putting it back in harm’s way.
CHK Stock has Fallen in the Last Month
When I last wrote about CHK stock on April 12, it was trading at $6.15, and oil prices were around $53 per barrel. As of its June 7 close, it was trading at $4.80, and a barrel of oil was going for less than $46.
I’d say CHK has as good a chance of going to $3.60 as it does rising to $6, a 25% move either way.
The Shorts Have Taken Hold
InvestorPlace contributor and options expert Joseph Hargett is bearish on CHK stock, suggesting the diplomatic troubles brewing in the Middle East muddy Chesapeake Energy’s chances of a revival.
“Short sellers have grown bold in recent weeks,” Hargett wrote June 5. “During the most recent reporting period, the number of Chesapeake shares sold short surged by 15% to roughly 162 million, or 18.45% of the stock’s total float. With the stock facing a multitude of problems, don’t expect these shorts to cover anytime soon.”
Bottom Line on Chesapeake Energy
I didn’t like CHK stock when it was trading above $6.
Now that Chesapeake Energy’s business has turned a corner regarding profitability as Q1 2017 showed — an operating profit of $241.0 million, considerably better than the $1.1 billion loss a year earlier — it’s not beyond the realm of possibility that CHK stock reverses course and heads higher.
However, I still think the debt issue makes this a stock that average investors shouldn’t touch with a ten-foot pole. I’d leave this one to the traders who earn their keep timing the movement of stocks and markets.
CHK stock is not for average retail investors. Not by a long shot.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.