Introducing: Stefanie Kammerman, Legendary Dark Pool Trader

For the 1st time ever, a former financial insider is stepping forward to show you how to spot Wall Street’s “hidden” trades before they move the market.

Wed, July 15 at 7:00PM ET

Is Chesapeake Energy Stock an Acquisition Target?

CHK stock has balance-sheet issues that investors should be aware of

Chesapeake Energy (NYSE:CHK) stock is a popular name, partly due to its low price tag. After its latest breakdown, though, CHK stock is changing hands for just over $3 per share. After trading below $2 in December and north of $5 last summer, CHK stock has had quite a volatile ride, to say the least.

The Risk/Reward Ratio Sets up a Perfect Trade Opportunity for CHK Stock

But should  investors should have faith in Chesapeake Energy stock? That question is particularly relevant, considering Chevron (NYSE:CVX) surprisingly  bought Anadarko Petroleum (NYSE:APC) for $33 billion, edging out Occidental Petroleum (NYSE:OXY) . Some investors are now searching for the next M&A candidate in the space, and many are likely wondering if it’s worth holding CHK stock in the wake of the Anadarko deal.

Is Chesapeake Energy Stock a Buyout Candidate?

Given the Anadarko deal, some may be thinking that CHK is an M&A candidate. While CHK stock price  may be low , and the market cap of Chesapeake Energy  stock is below $5 billion, those numbers are low for a reason. While CHK stock currently has a market cap of $4.97 billion, it has an enterprise value of more than $15.6 billion.

That doesn’t mean a deal is out of the picture, but because of CHK’s debt load, the number of companies that might be interested in buying it is limited. The company has more than $7 billion of long-term debt, and its current liabilities are almost double the value of its current assets.

CHK has reported strong net income, totaling $949 million and $873 million, for the last two years. But its cash flows are not attractive, and Chesapeake has some rather obvious balance-sheet issues. That’s not to say management isn’t trying or that CHK can’t improve. But CHK stock has  been below $10 for almost four years, and it’s been a sub-$5 stock for most of the last two, years. That wouldn’t be the case if things were going well for CHK.

Acquirers can do the math, too.

chart of CHK stock
Click to Enlarge
Source: Chart courtesy of

So is CHK stock breaking down at this point? The action isn’t promising, but we’re not wheeling out the coffin just yet. From its December lows, Chesapeake Energy stock has done a great job reclaiming its 20-day and 50-day moving averages and riding uptrend support (depicted by the purple line) higher. When Chesapeake Energy stock hit $3.50 earlier this month, the shares were up about 75% on the year.

However, that level acted as resistance, which is no surprise given that it has been a relevant support level in the past. When a notable level of support breaks down, it generally turns into resistance and vice versa. The recent pullback from $3.50 was more than just a stall, though. CHK stock quickly tumbled through uptrend support and its 20-day moving average.

As a result, those interested in CHK should watch the 50-day moving average and the $3 level. If these levels fail,  CHK stock will be flailing around looking for support, and could fall to $2.50.

If the 50-day and $3 level hold though, Chesapeake Energy stock could rally. The first test will be if it can reclaim its uptrend support and the 20-day moving average.

Bulls’ sights are clearly set on $3.50. It will be critical for CHK stock to get through that level, but the 200-day moving average is also key for CHK. That is where bulls need to be careful with their expectations. In addition to the $3.50 hurdle, CHK stock also has the 200-day overhead, as well as downtrend resistance (depicted by the blue line). Clearing all of those marks will be difficult for Chesapeake Energy stock, to say the least.

The Bottom Line on CHK Stock

Many investors love the fact that CHK stock is a sub-$5 stock with almost $10 billion in sales and a positive bottom line.

But it doesn’t matter, nor does it matter that Chesapeake Energy stock trades at just over five times its earnings. CHK has balance-sheet issues, and investors who buy CHK stock need to realize this is a speculative holding.

Investors who want a safer energy holding should consider Exxon Mobil (NYSE:XOM), BP plc (NYSE:BP), or Chevron, especially if the latter stock drops  down near $108.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

©2020 InvestorPlace Media, LLC