Chesapeake Stock Is a Massive, Overpriced Risk at Best

Chesapeake stock - Chesapeake Stock Is a Massive, Overpriced Risk at Best

Source: Philadelphia 76ers Via Flickr

Stifel analyst Karl Chalabala certainly thought so back in March 2017 when he boldly gave Chesapeake Energy (NYSE:CHK) a 12-month target price of $10 a share, double where Chesapeake stock was trading at the time.

Chalabala initiated coverage of the oil and gas exploration and production company on March 23, 2017, slapping on a “buy” rating and a doubling of its stock price citing rising demand.

“Following a wave of asset divestitures, debt repayments and midstream obligation renegotiations, we believe Chesapeake is well-positioned to succeed in the North American shale low-price commodity environment,” Chalabala wrote in a note to clients at the time.

Chesapeake Stock: A Big Risk Then

About a month after the analyst’s comments, I wrote a piece about Chesapeake suggesting it was still a huge risk for the average investor because its debt was more than double its market cap.

Furthermore, the intrinsic value of Chesapeake stock was impossible to figure out given its 1.7 billion barrels of oil equivalent were worth anywhere from $40 a barrel to $100 a barrel; no one knew and they still don’t.

Here’s what I had to say on the matter back in April of 2017:

“If you believe that energy prices will rise from their current levels around $53 to, say, $70, a lot of businesses will benefit from this increase, not just Chesapeake Energy. And the other side of this argument is … what if oil prices don’t rise? Goldman Sachs (NYSE:GSsees oil prices stabilizing over the long term, settling in the mid-$50s… Either way, why wouldn’t you just buy an oil-related exchange-traded fund to minimize your risk that CHK isn’t the one?”

Since that article was published, Chesapeake is down 23% while the Energy Select SPDR ETF (NYSEARCA:XLE) is up almost 7% over the same period.

No, Chesapeake isn’t part of the XLE, but it gives you an idea of the opportunity cost of listening to Chalabala’s assessment of Chesapeake’s situation.

Chesapeake Is a Big Risk Now

Later in 2017, I changed my tune a little bit on Chesapeake Energy stock, suggesting that if it could get to free cash flow neutral, something CEO Doug Lawler said was possible at $50 for a barrel of oil and $3 per thousand cubic feet of natural gas (Mcf). 

Free cash flow neutrality certainly helps stem the tide, but it doesn’t solve the bigger problem which is that Chesapeake Energy can’t seem to make money on a consistent basis at current energy prices… If you’re betting on CHK and can afford to lose the money, I don’t see a problem at less than $4. However, if this isn’t money you can lose, this isn’t a stock for you.”

How’s its free cash flow doing with a barrel of oil around $67 and natural gas around $3 per Mcf?

A quick look at its Q2 2018 report ended June 30 suggests that it’s getting closer with cash flow for the first six months of the year around $1.1 billion, capital expenditures around $1.3 billion, and a trailing 12 months free cash flow of -$573 million, its lowest level in a decade.

That said, its long-term debt is still $9.2 billion or more than double its market cap, although that’s expected to drop with the recent $2 billion disposition of some of its Utica shale assets in Ohio.

The Bottom Line on Chesapeake Stock

Like I said last September, for those that can afford to lose their investment, an entry point below $4 remains a good one.

Above that, I’d look elsewhere.   

As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

©2023 InvestorPlace Media, LLC