Unlike many analysts, I have an increasingly bigger appreciation for legacy fossil fuels over so-called clean energy sources like electricity. As a result, I’m currently willing to give energy names the benefit of the doubt. Unfortunately, companies like Chesapeake Energy (NYSE:CHK) are only clouded in doubt. Since the beginning of the year, CHK stock is down a staggering 36%.
It’s not entirely surprising how we got here. For starters, Chesapeake Energy stock hasn’t enjoyed stability in its underlying financials compared to its peers. Moreover, the energy firm never recovered from the industry crisis that plagued the middle of this decade.
Sure, we saw some spike moves higher. But for the most part, it’s been downhill for CHK stock since the summer of 2014.
Along with the rough financials, management made some poorly timed bets. Most recently, Chesapeake announced that it will plan new shale wells in Wyoming’s Powder River. However, both Brent Crude and West Texas Intermediate indices declined sharply since early spring of this year. Oil prices are now flat or below mid-January’s valuation, which obviously doesn’t help Chesapeake Energy stock.
Finally, the company has serious political risks. In the run up to the 2016 presidential election, Democratic candidates pushed for clean energy initiatives. Infamously, former Secretary of State and Democratic nominee Hillary Clinton stated that she would put coal miners out of business.
After the election, Clinton revealed that this comment was her biggest regret from the campaign. I don’t blame her. That comment spooked investors in CHK stock, while also galvanizing supporters of Donald Trump.
But now, we have a similar environment, and the Democrats aren’t ready to lose twice.
Pressured Environment for CHK Stock
If that weren’t enough, CHK has a tough earnings test ahead of its third-quarter 2019 report. This is scheduled for release on Tuesday, Nov. 5. For Chesapeake Energy stock, what matters most is not so much the Q3 results, but rather, the narrative. Still, with expectations lowered, the company must hit targets or risk further red ink in the markets.
For earnings per share, analysts have a consensus target of a loss of 10 cents. This is more or less in the middle of the estimate spectrum, which ranges from a loss of 14 cents to a loss of 6 cents. In the year-ago quarter, CHK delivered EPS of 19 cents against a consensus 15-cent forecast. In this fiscal year, Chesapeake has not come through with a beat on per-share profitability.
On the revenue front, analysts are targeting sales of $2.1 billion. This figure rests firmly on the lower end of estimates, which range from $1.9 billion to $2.4 billion. In the year-ago quarter, the company rang up $2.4 billion, beating consensus of $2.3 billion.
Despite beatable metrics, CHK stock has tumbled noticeably since the start of this week. Of course, some of the volatility results from the law of small numbers; that is, changes in small numbers often produce big percentage changes.
However, a rationale exists for the downturn in CHK stock. 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.
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.
Does a Speculative Opportunity Exist?
That said, I don’t think it’s all bad news for CHK stock. Yes, when you turn on the news, it’s explicitly negative for the energy firm. For example, Massachusetts Senator Elizabeth Warren proposes getting rid of fracking and oil and gas activities on federal land.
On both counts, such proposals would negatively impact Chesapeake Energy stock. I wouldn’t be surprised if these measures killed the company.
But with any politically motivated proposal, my question is simple: Who’s going to pay for this stuff?
In September, Warren introduced a $3 trillion plan for how the U.S. can transition to clean energy. But as we see from the California wildfires and the controversial PG&E (NYSE:PCG), clean energy isn’t exactly clean or even safe.
It’s this kind of wishy-washy thinking that got Donald Trump elected in the first place. Apparently, we’re going down this same road again, which benefits CHK stock. But if you want to engage shares, do so as a gamble, not as an investment.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
