To buy or not to buy Chesapeake Energy Corporation (NYSE:CHK) — that is the question. As with any hotly debated investment, CHK stock has its fair share of bulls and bears.
Although I can’t speak to every analysis, generally, both sides agree that Chesapeake Energy is seriously challenged. Both sides also agree that the price of crude oil and energy markets will determine who wins and who loses.
For that part of the debate, I don’t have anything more to add. What I will say is that investors need to consider a second component: time. Depending on your horizon, the risk-reward balance will appear either favorable or unfavorable. If you’re going for a speculative bet on commodity pricing (and that you understand the risks involved), have at it. But if you’re hoping that Chesapeake Energy becomes the next Exxon Mobil Corporation (NYSE:XOM), that’s going to be a stretch.
The morally bankrupt oil cabal also known as OPEC can’t even keep its own word to its members. For quite some time, OPEC manipulated oil supply-chains through production ramp-ups and cuts. This time around, they promised production curbs, but as InvestorPlace contributor Dana Blankenhorn notes, some members recently ignored protocol. In other words, levering an investment towards crude oil (especially in these times) is always risky business.
As Blankenhorn further points out, “demand for gasoline is falling, not just in the U.S., but in Asia as well.” This segues into a broader piece of advice: the Asia and China argument goes both ways. For instance, bullish arguments favoring Alibaba Group Holding Ltd (NYSE:BABA) always mention China’s billion-plus strong population. But if that population doesn’t want to buy your products, the China argument is automatically rendered bearish.
This is yet another strike against Chesapeake and CHK stock.
Massive Headwinds Impacting CHK Stock
If I were to gamble on CHK, then I have to consider the Trump administration as both a blessing and a curse. On one side, the “make America great again” message resonates with blue-collar, “can-do” American spirit. On the other hand, our political rivalries (and outright animosities) with Middle Eastern nations and Russia pose a problem.
Many of our readers have zero recollection of the oil embargos of the 1970s. I heard from older acquaintances that it was a particularly terrible time for American families. OPEC’s actions catapulted domestic energy policies, continuing to impact us to this present day. With a proud, patriotic President in Donald J. Trump, we have more incentive to stick it to any foreign competitor.
Let’s be real — Trump is the last person on earth to want to be perceived as being someone else’s female canine. Our energy policy is to first protect American interests, and second, to deliver economic pain to our adversaries. Certainly, we’re not going to stop pumping and let the Russians steal our market share. But that competitive hyper-drive is not beneficial for CHK stock.
I think the other major problem for oil companies is that no major markets operate in a vacuum. The American consumer is either hurting or is very cheap, per a cratering retail sector. If the automotive sector hasn’t hit peak sales, then demographic trends aren’t necessarily helpful. As I have mentioned previously, if the consumer economy is so robust, why do record-level auto loan defaults exist?
Americans are cutting back their expenditures. That hurts revenue potential for Chesapeake Energy. Furthermore, this is probably the reason why CHK stock has technically demonstrated weakness in the markets.
Chesapeake Energy Can’t Rely on Anything
If speculators are still gung-ho about betting on Chesapeake, I must warn that few “bonus” tailwinds avail themselves. Aside from weakening consumer expenditures, the U.S. Federal Reserve will not provide favors to CHK. Compared to international currencies, the dollar is strong. The unemployment rate is quite favorable. Absolutely no reason exists to tamper with this dynamic.
Further down the road, Chesapeake Energy must contend with technological paradigm shifts. Lithium, not oil, may be the energy source of the future. That’s why Tesla Inc (NASDAQ:TSLA) has committed billions into its Nevada-based facility. The Japanese, via Panasonic Corporation (ADR) (OTCMKTS:PCRFY) are also in Nevada, potentially setting up their nation strategically.
Oh yeah, the financials for CHK stock are a bit of a disaster, especially because of its huge debt load. As Blankenhorn explains, “each time oil looks set to rebound, debt-ridden oil companies lock-in the higher price with options, and go back to pumping. Companies like CHK are now called ‘dead men drilling’ for just this reason. They can’t turn a profit, but they can’t go out of business either. They’re being run at the behest of bankers trying to get their money back.”
Ultimately, CHK stock lacks a sense of predictability. It undulates while creating sub-channels with exceptionally choppy trading. Every now and again, you get a massive burst to the upside, or down. Chesapeake Energy has a strange looking chart. This environment only favors the traders and speculators.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.