Due to its incredibly-volatile nature, I haven’t had much love for Chesapeake Energy (NYSE:CHK). But because CHK stock has the propensity to swing in either direction on a moment’s notice, I can’t say that I’ve been particularly successful in navigating its treacherous waters.
That said, a recent warning I issued on the energy firm went exactly as I thought. Chesapeake Energy made waves when it announced that it will merge with WildHorse Resource (NYSE:WRD). At the time, I stated that management needed to do something to get back on track. However, incurring more debt on top of a highly-leveraged situation wasn’t it.
The markets punished CHK stock on the initial merger disclosure, which then prompted a question: was most of the bearishness baked in? Some positive trades suggested that Chesapeake Energy was on the rebound. However, I ultimately argued that the risks outweighed the rewards. Sure enough, CHK dropped more than 15% since my last article.
Such results tempt me to double-down on my bearishness. However, I’ve learned an important lesson about CHK stock: you don’t want to doubt it prematurely, or else it can scorch you. Having dropped more than 40% since the second half of this year, is it time to reconsider Chesapeake Energy?
CHK Stock Hopes to Snag a Natural Gas Lifeline
CHK faces two major headwinds. First, the company is deeply underwater. The WildHorse acquisition must start paying off quickly to make sense. Second, oil prices continue to slump.
But not all hope is lost for Chesapeake Energy. As our own Will Healy discussed, the energy firm has an opportunity to right the ship with natural gas. Over the past few weeks, this commodity’s valuation has skyrocketed. If this newfound momentum holds up, CHK stock could likewise experience a resurgence.
For the contrarians and speculators, several factors imply a positive move for Chesapeake Energy. In the domestic market, we have experienced an early start to cold weather. That of course pushes up demand. And while U.S. natural-gas production was already soaring at a record pace, demand is moving higher still.
Another impetus is the international markets. Europe places a high premium on natural gas, offering a lucrative channel for commodity distributors. Japan has an even-higher premium for liquefied natural gas. Should the winter weather fade prematurely, Chesapeake still maintains viable options.
On a geopolitical note, the worsening Ukraine-Russia conflict represents a potential boon for CHK stock. Western European powers have an uneasy relationship with Russia, who oppose its militancy but depend on its resources. If relations with Russia get worse, the demand for U.S.-based providers will only increase.
Why Natural Gas Isn’t All That
Although underlying economic conditions favor higher natural-gas prices, this doesn’t necessarily mean CHK stock will benefit.
In terms of the conflict in Ukraine, Western Europe can’t afford to ignore Russia altogether. In fact, the U.S. turning natural-gas exporter hasn’t changed the status quo. For one thing, Russia owns a geographic advantage that will never go away. As a result, it can provide the commodity at a cheaper rate.
But perhaps the most damning consideration is CHK stock itself. In November, the average price of natural gas increased 42%. In the same timeframe, Chesapeake Energy shares tumbled 18%. If this commodity represents the company’s future, it’s not a very good one.
Bottom Line for CHK Stock
From a technical standpoint, CHK stock failed to convincingly break below $3. That is perhaps an encouraging sign that a bottom has formed.
But do I trust this critical support line? In a word, no. The oil markets are a disaster right now. That means one segment of Chesapeake’s business is out of commission until further notice. The company must now rely on natural gas to pick up the slack.
But as we now see, this is no easy fix. The commodity faces many headwinds. Some challenges, like geography, cannot be resolved. Unfortunately, CHK needs all cylinders firing at optimum levels if it’s going to have a chance. What we’re seeing provides investors with no confidence.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.