Since reporting its quarterly results on Nov. 5, Chesapeake Energy (NYSE:CHK) has been in a nightmarish bear plunge. CHK stock has gone from $1.56 to 81 cents. This puts the annual return at a loss of 75%.
Yet might this be an overreaction? Could there be valuation? Well, maybe not.
The grim reality is that there is little to like about CHK stock right now. Perhaps the only tidbit of good news is that CEO Robert Lawler recently made a purchase of 50,000 shares for $45,740. But then again, he already owns 5.1 million in CHK stock. In other words, the purchase is really a token amount.
The latest earnings report certainly does highlight the challenges the company faces. It was actually the third consecutive time that the company missed Wall Street expectations. So either this implies that management is too optimistic about its prospects or there is little visibility in the business. But does it really matter? Both are not good.
The earnings report showed that the net loss came to a hefty $101 million or 6 cents a share. When excluding non-recurring items, the loss was even higher, coming to 11 cents a share. The consensus estimate was for a loss of 10 cents per share.
As for the top line, revenues were $2.06 billion, down nearly 15% on a year-over-year basis. The Street was forecasting $2.12 billion.
Now over the years, CHK has been restructuring its business. Consider that there has been more of a focus on oil production. But unfortunately, the timing on this has proven inauspicious, as prices have been under pressure. And of course, natural gas has been in a tailspin. From April to September, the average price for the commodity was $2.41 per million British thermal units, which is a multi-decades low.
True, CHK has indicated it will cut back on production as will other players in the industry like EQT (NYSE:EQT). But such moves probably won’t do much in the near-term.
The “Going Concern” Opinion and CHK Stock Price
When CHK reported its 10-Q, investors got another nasty surprise: the company issued a “going concern” opinion. This means that if the oil and natural gas prices remain depressed, the company may default on some of its debt convents, which could ultimately take the company into bankruptcy and wipe out the equity.
The 10-Q does mention:
“We are actively pursuing with support from the Board of Directors a variety of transactions and cost-cutting measures, including but not limited to, reduction in corporate discretionary expenditures, refinancing transactions by us or our subsidiaries, capital exchange transactions, asset divestitures, reductions in capital expenditures by approximately 30% in 2020 and operational efficiencies. We believe it is probable that these measures, as we continue to implement them, will enable us to comply with our leverage ratio covenant.”
But this could just be more of the company’s persistent optimism. If CHK sells assets right now, it does not seem like the valuations will not be robust.
Bottom Line on CHK Stock
When it comes to Chesapeake Energy stock, the real solution would be a sustained surge in energy prices. Yet there are few sings that this will happen, as the world economy has decelerated and there remain excess supplies on the markets. So a bet on CHK stock would be a huge gamble. Rather, if you are looking for an energy investment right now, there are certainly many other options, with reasonable values and strong dividends like Chevron (NYSE:CVX) or Exxon Mobil (NYSE:XOM).
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.