You know things are bad when a $101 million loss is the best thing Chesapeake Energy (NYSE:CHK) had to report Nov. 5 when it announced its third-quarter results. CHK stock dropped almost 18% on the news. The oil and gas producer continues its long death march to irrelevance and there is nothing the owners of Chesapeake Energy stock can do to change this. You should probably sell the stock while you still can.
InvestorPlace’s Josh Enomoto recently warned readers that CHK stock was under pressure approaching its Q3 report.
“On the financial component, you get the sense that the company is in a race against time. For instance, revenue inched higher on a year-over-year basis for Chesapeake’s Q2 2019 report. However, growth falls well short of what it was able to achieve years prior,” Enomoto wrote Nov. 1. “Another big problem is the cash burn. Although Chesapeake has produced some positive earnings, its free cash flow remains consistently negative. If you’re feeling pessimistic about Chesapeake Energy stock, you’re not the only one.”
Not Much Good to See at Chesapeake Energy
I’ve followed Chesapeake’s long ride down the drain for several years. Its CEO, Doug Lawler, continues to say all the right things. However, you can bet he’ll be the first one in the lifeboats when the energy business begins to take on water.
On an adjusted basis, Chesapeake actually lost $188 million in the third quarter, considerably higher than the $8 million lost in Q3 2018. Chesapeake lost 11 cents a share, 1 cent worse than analyst expectations. On the top line, its revenues were down almost 15% in the quarter to $2.1 billion, $60 million below the consensus.
Heck, if CHK stock wasn’t approaching penny status, these misses might be acceptable. However, the company now has missed analyst estimates for three straight quarters.
Either the analysts have all misplaced their financial modeling skills or Chesapeake is selling a much brighter picture than actually exists. I would have no trouble putting my money on the latter.
Free Cash Flow Neutrality
You see, Lawler has been selling positive free cash flow as far back as 2017. The Chesapeake CEO spoke at the Barclays CEO Energy-Power Conference on Sept. 5, 2017.
“The focus that we have on free cash flow neutrality is at a normalized price deck of $50 (per barrel) and $3 (per mcf), we believe is very achievable for us,” Lawler said at the conference. “We are really highlighting value over volumes, and we will be adjusting our capital program accordingly.”
Chesapeake finished fiscal 2016 with negative free cash flow of $1 billion. However, Lawler was confident it could break even. I believed him, suggesting a few days after the CEO’s September 2017 speech that speculators might want to consider its stock under $4.
Mind you, I also stated that CHK stock would never be an appropriate investment for anyone who couldn’t afford to lose the money — including those saving for their retirement and their kid’s college education.
The Bottom Line on CHK Stock
But more than two years later, Lawler is still chasing that horse.
“We remain confident in our strategy, asset portfolio and our talented employees, and we’ll continue to utilize all of our resources to drive for greater shareholder value and return,” Lawler said in the company’s conference call with analysts. “The volatile commodity price environment has pressured the speed and timing of accomplishing these goals, but we will continue to make incremental progress and improve our … competitiveness and profitability.”
Sun Trust Robinson Humphrey analyst Neal Dingmann had something to say about Lawler’s goals for the company when it comes to free cash flow. Lawler believes it can generate positive free cash flow in 2020. Dingmann, however, believes that it will have a hard time generating positive free cash flow in 2020 even with a significant cut to its capital expenditures.
The analyst has a “hold” rating on its stock and a $1 target price. To me, that appears generous, but he knows more about oil and gas than I’ll ever know, so I’ll give him the benefit of the doubt.
What I do know is that Chesapeake Energy has an Altman Z-Score of -0.28 at the moment, which suggests it’s got a good chance of going bankrupt in the next two years.
Fool me once, shame on you; fool me twice, shame on me. I fell for Lawler’s confidence back in 2017. I won’t do it a second time.
CHK stock is a dog with fleas.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.