It seems that each time I am asked to look at Chesapeake Energy Corp. (NYSE:CHK), the stock is hitting a new low.
In July, I called it a “dead company drilling.” In early August, I suggested only gamblers buy it. A few weeks later, I said it was sliding toward irrelevance.
Yet investors still want to believe in it. That is because Chesapeake drew a lot of interest from retail investors during the shale boom, the shares rising to over $60 per share on the promise of Appalachian shale gas; to almost $40 on its delivery in 2011; to almost $30 at the peak of the boom in 2014.
Since that time, founder Aubrey McClendon has died, and the company has been forced to shuffle or sell assets to stay afloat. The boom has become a bust.
It’s an American tragedy.
Can This Company Be Saved?
Through asset sales and cost-cutting, Chesapeake has managed to deliver two quarters of nominal profits, $140 million or 8 cents per share for the March quarter, $494 million or 47 cents per share for the June quarter.
Look inside those numbers as our Lucas Hahn did recently, and you get a less rosy picture. Debt due in 2027 is down to a near junk rating, the risk of bankruptcy is real, and the debt of $9.85 billion is greater than the last 12 months’ income of $9.33 billion. Book value is down to a negative $2.87 per share.
There remain oil bulls. Inventories of crude are finally falling, they will tell you, and a growing economy is going to mean higher demand, plus higher prices. Chesapeake’s natural gas production is also a huge export opportunity. Investor fear should be a buying opportunity.
The problem is that, in this case, it’s not. Chesapeake is in a race against time, the maturing of its debt and the cost of maintaining production matched against stabilizing prices. Each time things start to look better, more bad news hits.
The company’s operations were hit hard by Hurricane Harvey, according to The Street. The company is down to its core assets, productive wells in six major oil plays, and the only way to keep paying off its debt is to start selling the family silver, so to speak.
The Price is Not Right
Many investors are tempted to take a flutter on Chesapeake stock, because the stock price is low and bankruptcy seems a long way off. This means you have leverage if oil prices rise, and lately they have been rising, to nearly $48 per share.
But there are better vehicles for that speculation. In its June 30 report Chesapeake was nearly out of cash. Despite its recent asset sales, the company’s debt is increasing, not decreasing.
Even if oil prices start to rise, it’s likely they will rise too slowly to save Chesapeake.
The Bottom Line
It is possible that this stock will go up a few pennies. It may even go up a few dollars. But in the long run, this is dead money. The party’s 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 danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
