The last time I looked at Chesapeake Energy Corporation (NYSE:CHK) it was fighting to hold $5 per share.
Our Richard Saintvilus had called $5 an important psychological benchmark. Looking for some ray of sunshine, I called Chesapeake a stock for gamblers, having already derided it as one of the “dead men drilling,” producing oil and gas only to keep its loan portfolio alive. Those bonds sport high yields because they’re not expected to pay off.
Since then, the stock has continued to stumble, with $5 per share now a distant dream. The shares opened for trade on Aug. 16 at $4. This brought the market cap down to $3.7 billion, for a stock with revenues of $2.281 billion for its most recent quarter. That quarter had looked like it beat estimates, but it turned out Saintvilus was right on July 20 when he called it a good short.
Balance Sheet Tells the Tale for CHK Stock
A close look at the company’s balance sheet shows it has burned through its cash, and the value of its assets continues to depreciate.
In late 2014, Chesapeake was said to have assets worth $40 billion. Now its assets are worth just $11.9 billion. Thus, the debt-to-equity ratio continues to fly further out of reach despite its efforts to sell assets and pay down loans.
The company is now being run on a quarter-to-quarter, month-to-month, day-to-day basis. It is paying its current bills, and the debt load has been cut in half, but the actual value of the equity is now negative.
While conservative accounting makes the company appear to be profitable, earning $494 million or 47 cents per share for the June quarter, on revenue of $2.281 billion, the actual situation is dire. Fracked wells depreciate much faster than conventional wells, so Chesapeake must continue to spend money to maintain production.
Giving new wells names like “Rambo” and bragging about their flow rates makes for a handsome press release. Its field engineers are doing outstanding work, pulling out as much natural gas from Pennsylvania as downstream facilities can take, pushing as much as 32 million pounds of material down a single wellhead. But it’s not good enough.
From the standpoint of profitable operations, Chesapeake is doing a lot of things right, as our James Brumley wrote recently. But it can no longer control every aspect of its business.
Chesapeake can’t control the price of oil and gas. Natural gas prices remain below $3 per million BTUs, having peaked late last year around $3.75. Oil prices continue to bounce off $50 per barrel, opening for trade Aug. 16 at $47.72 per barrel.
Chesapeake can’t control the depletion rate of its wells, and it can’t stop spending money on them. It may appear to be profitable, but it’s a starvation diet that has it continually tightening its belt, not the ruddy good health you’re looking for in a stock.
The Bottom Line on Chesapeake
You will still find Chesapeake bulls who crow about its positive net income, its profitability compared with its peers and its steady work in operations, designed to turn it into a mature company.
But there’s another word for mature — old. Crying over the fate of Chesapeake is as worthwhile as moaning about the fate of Sears Holding Corp. (NASDAQ:SHLD). Like Sears, Chesapeake has had its day and that day is ending. It is sad, to be sure, but you’re not investing to be a mourner, you’re looking for opportunity.
The best strategy is to look elsewhere for it. This play is over.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.