2017 has delivered a frustrating one-two punch to Chesapeake Energy Corporation (NYSE:CHK). The CHK stock price sank for most of the year after briefly clearing $8 in December. Then, when oil prices finally rallied, boosting stocks in the sector, CHK seemed left out.
CHK has bounced 13% off its 52-week low — but it’s still down 45% year-to-date. In contrast, Devon Energy Corp (NYSE:DVN), also based in Oklahoma City, has seen a 32% jump off its lows and now has lost just 17% of its value in 2017. ConocoPhillips (NYSE:COP) is up (modestly) so far this year. Large international producers BP plc (ADR) (NYSE:BP) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A, NYSE:RDS.B) have risen 4% and 13%, respectively, even with a pullback over the past few sessions.
Chesapeake stock’s performance is especially disappointing because, in theory, it should be one of the bigger beneficiaries of higher energy prices, as I’ve argued in the past. The combination of leverage on the balance sheet and the leverage inherent in wildcatting should magnify any gains in realized prices. Yet, as oil has recovered over the past few months, the CHK stock price hasn’t followed suit.
I still think there’s some value in CHK stock below $4, albeit as a high-risk, high-reward type of play. But Chesapeake Energy needs to execute — and it needs help from energy prices. Right now, a modest run in natural gas aside, it’s not getting either.
Earnings and Debt Are Hanging Over Chesapeake Stock
There’s definitely an “OK, what now?” aspect to the story surrounding CHK. It’s easy to forget in this bull market, but just 21 months ago rumors of a potential bankruptcy were swirling and CHK shares fell below $2. With asset sales cleaning up the balance sheet and higher energy prices and lower costs lowering the company’s break-even point, those fears started to recede — and CHK surged.
But, now, the market is looking for a little more than “not going bankrupt”. It’s looking for progress. And that hasn’t quite come yet. As I wrote at the time, third-quarter earnings earlier this month disappointed, sending Chesapeake stock down 7%.
By the end of the quarter, debt had been reduced just $200 million through the first nine months of the year. Cash flow break-even remains a goal, but one that looks unlikely to come until 2018. Capex guidance for 2017 crept upward and production guidance for 2018 was below expectations.
Stepping back, it’s easy to see why the market has lost some patience. History aside, Chesapeake Energy is a company with $9.8 billion in debt and still-negative free cash flow. Another $2 billion to $3 billion in asset sales should help the balance sheet — but progress has been relatively slow. It’s simply not a compelling story at the moment.
CHK Stock Price Can Go Higher
I get the frustration with the CHK stock price, but I’m not ready to count Chesapeake Energy out just yet. Progress has been slow, but there has been progress. 2018 numbers should be better, with capital expenditures likely to come down and production expected to rise.
Energy prices need to stay up, and the recent pullback in oil has led the sector to pull back sharply over the past two weeks. But with a little help and a little better execution, CHK still has a chance to rebound. The stock trades at under 6 times next year’s earnings-per-share estimates, one of the lowest multiples in the sector. And I still think it’s one of the better plays — if not the best play — for energy bulls.
But execution needs to improve and there is some near-term risk. The pullback in oil prices may continue. Chesapeake’s Q4 earnings in February will be key for the stock, with investors no doubt focusing on updated 2018 guidance. There’s long-term risk, too, of course, given the nature of the business and the still-leveraged balance sheet.
There’s long-term reward too, however. CHK is a stock that can double with a little bit of help and a little bit of improvement. Investors are worried on both fronts — and with good reason — but Chesapeake Energy still has a chance to write a happy ending.
As of this writing, Vince Martin has no positions in any securities mentioned.