All is not well for the energy sector, and that spells trouble for Chesapeake Energy Corporation (NYSE:CHK). The liquid natural gas specialist was already in trouble heading into this year, burdened under a mountain of debt and battling low natural gas and energy prices. And things are getting worse for CHK stock.
My advice? Don’t struggle to swim upstream, and instead consider one of two bearish trading ideas that are setting up right now.
This year was supposed to be a boon for Chesapeake Energy. OPEC cut production across the board, and even extended those cuts for a longer-than-expected nine months. Additionally, President Donald Trump campaigned on a platform of supporting U.S. energy production.
However, there is a spat brewing in amid oil producers in the Middle East that could threaten those production cuts. Over the weekend, Saudi Arabia, Egypt, Bahrain and UAE severed diplomatic relations with Qatar, accusing the latter of interfering with their internal affairs and backing terrorism.
What’s more, Russia’s largest oil producer doesn’t believe the cuts amount to much anyway. “A number of large-scale oil producers that do not take part in these agreements use such conditions to strengthen their market positions, and that leads rather to new imbalance than to the sustainable development,” Rosneft CEO Igor Sechin said over the weekend.
If that wasn’t enough, analysts are beginning to fear that America’s backing out of the Paris climate accord means more drilling and production stateside, leading to increased global supply and lower energy prices.
Click to Enlarge The overall results have been ugly for Chesapeake Energy. Year-t0-date, CHK stock is down more than nearly 30%, more than doubling a decline of about 14% it’s peers in the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE).
Despite a brief pop in April, CHK has continued its downward spiral unabated. In fact, the shares hit a fresh 52-week low on Friday below former support in the $5 region.
Turning toward the sentiment front, we find a growing hoard of bears.
For instance, Thomson/First Call reports that only nine of the 35 analysts following the shares rate them a “buy” or better. Meanwhile, the 12-month price target rests at $6.94, implying almost 42% upside for the shares over the long-term.
In other words, there is still room for potential downgrades and plenty of room for price target cuts as CHK stock continues lower.
Elsewhere, short sellers have grown bold in recent weeks. 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 any time soon.
In fact, increased shorting activity could provide additional selling pressure.