Beleaguered former energy sector stalwart Chesapeake Energy Corporation (NYSE:CHK) can’t seem to catch a break. After getting “lean and mean,” reducing debt and improving its asset portfolio, the unthinkable happened. Energy prices have once again started to sink. And that has plagued CHK stock in a big way.
So far this year, Chesapeake Energy has fallen about 30% and shares have now once again drifted below $5 per share.
But that $5 price tag for CHK stock could be the bargain price investors are waiting for.
Shares of the firm continue to be evaluated on just oil prices. Nothing more, nothing less. Traders are completely forgetting its turnaround plans and overall debt reduction steps. That’s still the main focus of Chesapeake and it should still be the main focus for investors in shares.
And in that regard, CHK stock remains a pretty big bargain.
Chesapeake Energy Is Still Going Strong With Debt Reduction
We all know the story at CHK. In its efforts to be the fracking kingpin, Chesapeake piled on the debt. That monster debt load became an albatross around its neck and nearly sank the firm as energy prices cratered. It then got smart and started selling assets, reducing costs and paying off that once $21 billion in debts.
All was right in the world for CHK.
However, since the start of 2017, things haven’t been so bright for Chesapeake Energy. Oil prices have once again begun to dip on rising supplies and slack demand. It turns out OPEC’s cuts didn’t really help and frackers only fracked more. None of this was seen as positive for CHK shares and the stock has spent most of the year in a downward spiral.
And that spiral should be enough to start tantalizing value hunters.
For one thing, Chesapeake Energy continues to reduce its debts by a lot. We’ll know more when the firm reports earnings in about a week. However, some preliminary news on its efforts have already been announced.
In about 18 months, CHK has reduced its overall debt by about $2.6 billion. Moreover, it has managed to lower the interest rates overall outstanding issues and has managed to push back the maturity dates of others. For example, in May, Chesapeake Energy announced that it would issue $750 million in additional notes in a private placement for tender offers and debt repayment, while this past June, Chesapeake Energy redeemed all of its 2.8% contingent convertible notes.
At the same time, CHK announced it has preliminary sold around $350 million under a PSA. These asset sales will continue to help the firm prune its portfolio, reduce costs, fund drilling programs and pay down more debt. Chesapeake Energy CEO Robert Lawler estimates that the firm will be able to reduce its debt by a further $2 to $4 billion by 2018 thanks to asset sales and overall debt reduction efforts.
And speaking of Chesapeake Energy’s assets, CHK has continued to focus on costs as well. Today, management at Chesapeake says it needs $35 to $40 per barrel oil for its Eagle Ford, Powder River Basin and Mid-Continent assets. For the Marcellus and Haynesville, we’re looking at $2.10 to $2.50/MMcfd in terms of natural gas. That’s well above current prices for both commodities.
When you add in its $3 billion in cash and $3.8 billion still available on its revolving line of credit, you really have a very different firm than even just a year ago. And yet, investors are valuing CHK stock like its still dying.
Bottom Line on CHK Stock
Chesapeake Energy continues to improve with every quarter and the firm isn’t a bankruptcy or dead energy stock walking anymore. And yet, investors have been treating it like one.
Does CHK stock still have its warts? Yes. Things are nowhere as bad as they once were. For forward thinking investors, this leads to an interesting opportunity to snag shares of Chesapeake Energy still cheaply as its turnaround continues to make progress. It’s still a risky capital play, but risks are now in the investors favor by a long shot.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
