For the life of my I don’t know why people keep flogging Chesapeake Energy (NYSE:CHK). They had a good run early this decade, but they’re overwhelmed by $10 billion in long-term debt, which means any success goes to the bondholders. Chesapeake Energy stock is not what it once was.
Even before founder Aubrey McClendon died in 2016, his successors were moving away from the northeastern natural gas that made their name, into oil. Then gas prices went up because gas had delivery infrastructure, and Chesapeake couldn’t get their price on the oil.
Their latest move is the $3.98 billion purchase of Wild Horse Resource Development, which does bring some Eagle Shale acres and two new board members. The combined company is now the second-leading operator in the play, which extends in an arc from the Del Rio up toward Dallas. Chesapeake shareholders own 55% of the combination.
The deal also brought Chesapeake $980 million more debt.
Aubrey McClendon and Chesapeake Energy Stock
The death of McClendon, who at the time was under indictment for trying to rig lease prices, should have sounded the death knell for the company, because McClendon was its brains as well as its heart.
It was McClendon who made fracking pay early in the decade, working an eastern Pennsylvania formation called the “Marcellus Shale” and bringing up a wealth of natural gas that still means the eastern seaboard is energy independent. But there was too much of a good thing, prices crashed, and the debt used to acquire leases became an unmanageable burden after 2014.
Since then Chesapeake has become what I call the “Flying Dutchman” of the oil patch, going from play to play, trading Ohio for Texas, then Texas for Wyoming, always finding a combination of oil, gas and natural gas liquids but doing little more than paying off bondholders.
The company always has another story to tell and it always looks promising, but that promise is always a year or two away. The company trades on its name and on its legend, but its results always come up short.
Chesapeake is next expected to report earnings Feb. 27, with 16 cents per share expected. Multiply that by four, divide by the stock price and this looks like a winner. But the earnings aren’t reliable, they’ve regularly been followed by losses, and you’re not going to see a dividend.
Bonds and Chesapeake Energy Stock
Chesapeake has become a company run for its bondholders. Chesapeake managed to sell $1.25 billion more in debt last year, just before the latest crash in oil prices. Why did people buy? Probably because, while Chesapeake hasn’t delivered any return to shareholders in years, it has been good for its debt service, and these bonds were priced at 7.5%.
The company’s 2021 debt is currently rated at B3, well into the junk category, but speculators are finding profits in a thinly-traded market. Buy them on pessimism, sell on optimism, and a savvy investor can find a capital gain as well as a handsome return.
But it’s going to take nerves of steel, your timing must be exquisite, and information on the market is going to cost you money. Personally, I prefer the Indian casino to betting on Chesapeake Energy stock.
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 [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.