Chesapeake Energy (NYSE:CHK) has become the “Flying Dutchman” of the oilpatch, wandering from strike to strike, never able to reach the safe harbor of profit. CHK stock is down more than 14% in the past three months, compared to the S&P 500 index‘s almost 8% gain.

After pioneering northeastern shale gas plays early in the decade, the company traded them in for the ready oil of Texas’ Eagle Ford a few years ago. Now Chesapeake is calling Wyoming’s Powder River Basin its growth engine. Sail on, sailor.

All this is being done in search of an elusive profit, big enough to pay down $9 billion in debt accumulated during its glory days early in the decade. But each time Chesapeake makes progress, it must roll over debt, or take on new debt. Most recently it took out another $1.25 billion in debt, due in 2024 or 2026 at 7% to 7.5%. 

The Gas Glut

There remain Chesapeake bulls, who note that CHK’s debt is now half what it was in 2012, that the shares are dirt cheap, and that there must be a profit in oil priced at $75 per barrel. 

The problem, as Chesapeake’s second quarter report makes clear, is that it’s not producing a lot of oil. Production averaged 90 barrels per day during the second quarter, and while it got an average price of $68.92 on that oil, it also produced 2.3 mmcf of natural gas a day, for which it only got $2.56 per mcf. Its price per barrel of oil equivalent (BoE) thus was $25.56.

Under the late Aubrey McClendon, Chesapeake pioneered fracking for natural gas, which involved pushing water, sand and chemicals down into wells at high pressure, fracturing rock and releasing the trapped resource. It just did this too well. Natural gas is now dirt cheap, which is great for consumers, businesses and exporters but bad for producers.

Oil Search

That’s why Chesapeake sold acreage in Ohio’s Utica Shale for Texas’ Eagle Ford. Texas’ more oil-rich resource yielded $50.70 per BoE in the second quarter, against $23.52 in Ohio. The Eagle Ford play is also close to pipelines, so it gets $70.51 per barrel of oil there. The hope is that Powder River will also be an oil-rich play. So far, Chesapeake is getting just $36.82 per BoE there.

Chesapeake says its wells in the “Turner formation” of eastern Wyoming could prove highly profitable. It sank five new wells there in June and July, with oil representing 65% of what came up, and it hopes to put 28 wells into production there through the end of the year.

The bull case is that shares are so cheap — with a market cap of $4 billion on revenue that could top $10 billion this year — that new profits will flow once Wyoming oil does. But that’s the boosters talking. Of the 21 analysts currently following the stock none have it rated as a buy, and seven are saying sell it.

The Bottom Line on CHK Stock

If the Turner wells come in with oil instead of gas, Chesapeake could generate significant operating cash flow. But it takes money to make money, and so Chesapeake keeps recycling debt to play, now at higher and higher prices. That’s not helped CHK stock much.

It’s a race, between the hope of oil rich strikes yielding cash flow and the reality of debt costing more and more money. To the hope side of the ledger, Chesapeake plans to add efficiency, in the form of year-round drilling and technology that reduces labor costs. But to that you also add uncertainty, over the future price of oil and the ability of producers to get the stuff to market, not to mention the risks of accidents. 

Maybe, this time, Chesapeake will strike it rich. Hope springs eternal in the oil patch.

Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.