Back in May of this year, my mental scales finally tipped in favor of Chesapeake Energy Corporation (NYSE:CHK). Like any other energy outfit, there were challenges ahead for the company, but I opined that CHK stock was finally ready to rebound in a significant way, driven by renewed cost-control efforts and increased production of oil and gas.
So far, no dice. In fact, not only has the CHK stock price not grown, it’s lost ground. The setback hasn’t been devastating, but it’s certainly been frustrating.
So now what? The biggest mistake any investor can make is being shaken out of a trade too soon. On the other hand, the second biggest mistake an investor can make — and it’s a close second — is not bailing out of a trade when the risk becomes greater than the reward. CHK stock is right on that fence. Here’s what will push it off that fence, on one side or the other.
Less Pros, More Cons for CHK Stock
Here’s the crash course on Chesapeake Energy Corporation. It’s categorized as an oil and gas play, lumped in with the likes of BP plc (ADR) (NYSE:BP) and Anadarko Petroleum Corporation (NYSE:APC). Make no mistake though, it’s predominantly a natural gas company, cranking out an average of 2.867 billion cubic feet (BCF) of natural gas and 66,700 bbls of natural gas liquids (NGLs) every day, on average, last year.
And, that’s a core problem. While crude oil prices are up significantly since May, that’s meant little to Chesapeake as gas prices remain suppressed. Actually, they’re more than suppressed. From a technical-charting perspective, natural gas looks like it’s being forced lower after the rebound attempt from earlier this year failed to develop. A move below the recent low of around $2.88 per MMBTU could start a selling avalanche.
It’s not just tepid natural gas prices, though.
A little less than a year ago, CEO Doug Lawler was touting asset sales as a means of shoring up some holes on a relatively salvageable balance sheet. He was ultimately aiming to reduce the company’s debt load by $2 billion to $3 billion. It doesn’t appear any meaningful divestitures have transpired though. Per a presentation made at the Deutsche Bank Leveraged Finance Conference earlier this month, the priorities for the last half of this year and all of 2018 will be asset sales to the tune of the same $2 billion to $3 billion range.
Indeed, the company recently decided to essentially refinance $850 million worth of debt maturing in 2025 with notes that won’t mature until after that time. The move will effectively buy time for the company, prompting one key question: Why does it need to buy time?
To that end, even with the reconfiguration of its debt, the presentation made at Deutsche Bank made it clear that 2021 and 2022’s debt maturities are significant. If nothing changes operationally, and no assets are sold, Chesapeake Energy won’t be able to do anything except kick that can down the road as well. There’s no assurance the terms of those refinancings would be palatable though.
All in not lost, however. Current and would-be owners of CHK stock can take some solace in the fact that the company foresees a serious ramp-up in its oil/gas output for the fourth quarter of this year on the heels of a growing number of turn-in-line wells that are about go into production (if they haven’t already done so).
The improved output will mean little, however, if gas prices don’t perk up. And as of now, it doesn’t look like that’s in the cards.
Bottom Line for CHK Stock Chesapeake Energy
On balance, I’m finding it difficult to stick with my optimistic call from earlier this year. On the flip side, if you were leaning toward continuing to hold CHK stock on the prospect of the planned asset sales and increased output, you wouldn’t be alone, nor would you be crazy. As most of the experts have noted, the kind of change Chesapeake is looking to make takes time.
But with natural gas prices declining, I could think of more compelling opportunities elsewhere.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
