I don’t know whether or not Chesapeake Energy Corporation (NYSE:CHK) will turn out to be a deep-value play or not, but the price is currently low enough to at least make me consider speculating. Still, I don’t see this as a great time to own Chesapeake Energy stock.
Chesapeake Energy stock has been on a wild ride, hitting a low of $2 in 2016 when oil prices hit $25 per barrel, but then surged up to $7, before landing back near $2.50 before earnings.
But I look at it this way: some of the best investments I’ve ever made were the ones where the stocks had been sold off by the market for reasons the market didn’t really understand.
Chesapeake Energy Stock Breakdown
When it comes to Chesapeake Energy, earnings seemed to deliver encouraging news until you break them down.
Q4 production was just under 600,000 barrels equivalent per day, up 3% over the prior year. Actual profit-generating revenues were about $1.25 billion. The cash flow situation was a bit of a disappointment once you work through all the adjustments.
Sure, the profit of $405 million looked great, but you have to back out asset sales of $81 million, and capex of $523 million, and suddenly things aren’t so rosy. Actual free cash comes to negative $100 million.
The trick with capital intensive businesses like this is that a company needs to spend money to make money. The budget has to support growth. Further, if CHK continues to sell assets that produce energy, then less energy is produced and sold.
I’m concerned that debt bounced back up to just under $10 billion. Chesapeake Energy stock is not going anywhere as long as the mountain of debt it has remains. The debt service is killing CHK stock, and so is the preferred stock it must issue dividends on.
More concerns about CHK Stock
What’s also concerning is that even with oil prices up in the $60s, CHK couldn’t really get cash flow positive. That’s not good. Natural gas prices have been weak, though. Still, I’d rather not have to rely on long-term high pricing in both of these components and hope that CHK is able to produce profitably.
Now, management seems upbeat about 2018. They hope to be cash flow neutral (EBITDA, not free cash) and believe they can hit this with oil averaging a bit under $62 per barrel and natural gas at about $2.50 per MCF.
Overall, then, you have to decide what kind of risk you want to take. In my deep-value scenarios, I see potential that the market missed. EZCORP, for example, had major problems but its core business was worth $9 per share and the stock was at $3.
That’s not the case with Chesapeake Energy stock. The company is in real trouble and has to thread several needles first to say afloat and then to grow.
That’s a long way off. I think even $2.96 per share may be a bit high for speculation.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns shares of EZPW and ENVA. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
