Along with many other stocks this year, Chesapeake Energy (NYSE:CHK) has posted a nice return. Note that the shares are up about 19%. This is in-line with other operators like Devon Energy (NYSE:DVN), but this masks a roller-coaster ride. First of all, Chesapeake Energy stock is still well off its high.
Since July, the shares have plunged from $5.29 to $2.50. Something else: from Jan. 30 to Feb. 8, Chesapeake Energy stock fell every single day!
What’s going on? Well, the overall volatility in the energy markets has certainly been a major factor, as there has been continued weakness in crude oil and natural gas prices.
Some of the reasons include the strength in the dollar (many commodities are purchased with U.S. dollars), rising production (especially in the U.S.) and a global economic slowing, such as in China and Europe.
Of course, the energy market can turn quickly. But at least for now, there are few catalysts to get things back on track – and this should weigh on Chesapeake Energy stock.
Operations and Chesapeake Energy Stock
Now I believe that the company is well run. Since coming on board as CEO in 2013 after a successful stint at Anadarko Petroleum (NYSE:APC), Robert Lawler has wasted little time in improving the operations and the balance sheet.
The actions have included more than $1 billion in annual cost cuts and reductions of over $12 billion in debt and more than $10 billion in legacy commitments. Lawyer has also been effective in finding ways to improve cash flows and be disciplined with capital investments.
Despite all this restructuring, Lawler has still somehow found ways to expand the company’s unconventional assets. There are currently about 14,900 oil and natural gas wells in areas like the Eagle Ford Shale in South Texas, the Anadarko Basin in northwestern Oklahoma, Marcellus Shale in the northern Appalachian Basin in Pennsylvania and Powder River Basin in Wyoming.
The recent $3.977 billion acquisition of WildHorse, which is an oil and gals company with assets in the Eagle Ford Shale and Austin Chalk formations in southeast Texas, should also be a positive for CHK stock.
With the deal, the oil production is estimated to more than double by the end of 2020 and will bring the overall oil mix to about 30%. There should also be a 50% improvement in EBITDA margins. As for the proved-but-undeveloped oil reserves, these have tripled to 320 million barrels.
WildHorse’s Eagle Ford holding is particularly attractive. It has about 420,000 acres and about 80% to 85% is underdeveloped. So yes, there is quite a bit of potential. Chesapeake’s proven track record with cost efficiencies should also be a big help. In fact, there are expected to be $200 million to $280 million in annual savings over the next five years from the acquisition.
Bottom Line on CHK Stock
It’s really tough to find faults with Lawler’s actions. But unfortunately, the key driver is the energy market. And for the most part, the fundamentals are looking weak. They include a terrible combination of oversupply and lagging demand.
Yet this does not necessarily mean you should avoid CHK stock. As InvestorPlace.com’s James Brumley has noted, the company is a “best-of-breed pick within the exploration and production arena.”
But I think CHK stock is still for those who are willing to take a long-term view on things. Although, with the stock well off its highs, the current price point does look reasonable, with the forward price-to-earnings ratio at a mere 4X.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.