Chesapeake Energy Corporation (NYSE:CHK) could be poised for a comeback. The Oklahoma City-based exploration and production firm has returned to profitability on rising prices in its sector. Now, as the company strives to repair its balance sheet, profit forecasts, as well as an emerging export market, could turn the company around and lead to massive gains in CHK stock.
From a fundamental perspective, CHK stock remains in poor shape. Although investors will like its price-to-earnings (PE) ratio of 6, the financials remain troubled. For one, it remains a $4.1 billion company with almost $9.4 billion in short- and long-term debt. While the market cap and debt levels have improved over the last year, the company remains in a precarious financial position.
Also troubling is the value of current assets exceeding its current liabilities. This serves as a sign that the company has trouble paying its current bills. Plus, the fact that most of its current liabilities fall under a vague “other current liabilities” category will likely not reassure investors.
Profits Back, Debt Levels Fall for CHK Stock
Given these challenges, one might wonder why I would want to take a chance on CHK stock. The short answer hinges on oil and natural gas prices. Despite its troubles, Chesapeake remains the second-largest natural gas producer and 13th largest oil producer in the U.S. The low energy prices that nearly drove CHK stock into bankruptcy in early 2016 have reversed course. Crude oil prices have remained above $70 per share for most of the month. Also, natural gas prices, which have struggled to gain traction with rising oil prices, are once again approaching $3 per million BTUs.
Other than a modest loss in the third quarter of 2017, the company has moved on from the massive losses seen in 2015 and 2016. The company earned 90 cents per share in 2017. Though analysts expect a modest drop in profits in coming years, they expect the company to remain profitable.
The company also vowed to reduce debt by $2-3 billion by the end of 2018. That would take the debt level to no higher than $7.4 billion. The enterprise value of the company is believed to stands at least at the $12.75 billion level. If the stock price were to match this enterprise level, the stock would rise to $14 per share. Keep in mind, this stands as a conservative estimate. Although $7.4 billion remains a high debt load for a $12.75 billion company, it becomes a more manageable financial situation than the company has seen in the last few years.
CHK Stock Will Likely Benefit From Exports
Also, investors should not forget the emerging natural gas export industry. Much of Chesapeake’s natural gas can be easily shipped by pipeline to the export terminal at Sabine Pass. Cheniere Energy, Inc. (NYSEAMERICAN:LNG), which operates Sabine Pass, will begin operations at its second terminal in Corpus Christi in the first half of 2019. Likewise, Dominion Energy Inc (NYSE:D) has also increased its focus on natural gas. Although a more diversified player, it expects natural gas to make up a majority of their production over the next 15 years. It has also begun exporting natural gas out of its Cove Point terminal in Maryland.
Hence, CHK can sell much of its natural gas to markets in Europe and Asia. Pricing also remains favorable in these markets. Europe currently pays about $7.80 per million BTU for natural gas, while Japan pays around $9.40. Given this pricing, the prediction of natural gas below $3 for years to come could prove to be overly pessimistic.
Concluding Thoughts on CHK Stock
Consistent profits, debt reduction and exports could take CHK stock to massive gains. CHK nearly fell into bankruptcy during the oil price slump of a few years ago. As a result, debt remains burdensome and the stock has struggled to reach $5 per share.
However, the company has again become profitable with the rise of oil prices. Also, debt levels continue to fall. Moreover, an emerging export market could see the company selling its gas at much higher prices abroad. Given these factors, I believe CHK stock is positioned for massive gains as higher prices and new markets return Chesapeake Energy to prosperity.
As of this writing, Will Healy is long CHK stock. You can follow Will on Twitter at @HealyWriting.