Sell CHK Stock – Chesapeake Gains are Just a Head Fake

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The oil markets over the past few years have been nothing but a tease. Sadly, for long-term proponents and shareholders of Chesapeake Energy Corporation (NYSE:CHK), it’s a point that rings all too familiar. CHK stock has shed a gut-wrenching 38% year-to-date. Similar tales abound for CHK competitors, such as Anadarko Petroleum Corporation (NYSE:APC) and Marathon Oil Corporation (NYSE:MRO).

A major reason for the overall stench in the oil markets is OPEC, specifically, its efforts to collectively curb production and thus artificially engineer higher prices. chk stockFirst, it was (and usually is) a major ordeal to get disparate nations to agree on a production cut. Obviously, each nation has its own interests, and the pain of this collective effort is felt unevenly. Second, even though OPEC achieved a consensus, the results have mostly been disappointing.

But even when the energy markets did occasionally move higher, CHK stock was unable to carry momentum forward. While higher energy prices are generally a positive for oil stocks, several mid-tier names were gutted during the initial 2014 collapse. The names that survived bankruptcy were forced to divest assets and take on new debt.

A few companies were able to make the best out of the situation, using the collapse in oil prices to secure futures contracts. At these deflated rates, these bold firms scored a killer deal. Unfortunately, CHK is too deep in the mud financially to sustain any tailwinds.

However, given the recent spike in oil prices, along with a tick up in CHK stock, have Chesapeake’s prospects changed?

The Oil Rally Has Asterisks

A major reason for the bullishness in energy markets is Middle Eastern politics. Turkey threatened to cut off oil exports from the Kurdistan region of Iraq due to the Kurdish independence referendum. Also, fears linger that the oil oversupply dynamic will shift to a shortage due in part to rising economic demand. If true, these factors would support CHK stock, which needs all the help it can get.

But like anything involving crude oil, I wouldn’t set my hopes too high. As Bloomberg writer Julian Lee notes, the steadily gaining prices have yet to fully hit the gas pumps. Once they do, the contention that crude will continue to rise unchallenged is questionable at best. Furthermore, it’s not 100% clear that oil supply will decline enough to spark a broader recovery.

Granted, since the beginning of September, CHK stock jumped an impressive 20%. After a fiercely bearish cycle in the oil benchmarks, investors are now tempted to pull the trigger, and I understand this sentiment. If you do decide to buy CHK stock, I would only regard it as a short-term trade and not as a reliable, long-term opportunity.

Sometimes, you make money in the markets from poor decisions. I would put Chesapeake Energy firmly in this category. The giant risk in making “dumb profits” is that you might conflate your good fortune with astute analysis. Yes, CHK stock could still move higher, but that doesn’t mean that this company can cheat economic principles indefinitely.

Little Is Favorable for CHK stock

A perhaps insurmountable headwind for Chesapeake is that our economy isn’t strong enough to handle higher oil prices. From 1978 until the end of last month, the civilian unemployment rate and consumer sentiment shared a 59% negative correlation. That is, as unemployment declines, consumer sentiment rises. Generally speaking, outside of recessions and other economic pressures, this inverse relationship holds true.

But in 2017, this relationship became a direct one. Now, low unemployment is associated with fading consumer sentiment. That doesn’t make any sense other than to suggest that the economy isn’t nearly as robust as advertised.

We can look to the poorly performing retail sector, and subprime auto loans are worryingly common. People, especially millennials, aren’t buying homes and taking an important step up. Many more warning signs exist. Whatever your thoughts about the state of the economy, the evidence doesn’t look rosy for CHK.

But the real nail in the coffin is that Chesapeake is a fundamental mess. InvestorPlace contributors Dana Blankenhorn and Lucas Hahn have both done an excellent job detailing the company’s woes. In a nutshell, CHK took on excessive debt, and it can’t pay it back. Bankruptcy is a genuine threat.

Nothing is going the embattled energy company’s way. In order to have at least a small window of hope, management will need a few stars to align. But now that you have a struggling company trading in a questionable market against the backdrop of a lukewarm economy, I don’t see any substantive upside for CHK.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/chk-stock-dont-be-fooled/.

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