Shares of Chesapeake Energy stock (NYSE:CHK) are struggling to maintain tepid gains. The CHK stock price has been climbing modestly since Dec.18 on the announcement of a life preserver deal. The company refinanced some of its debt in an effort to stop the clock on its slide towards insolvency. One of the key components of the deal was the five-year timeline to pay back the debt. As Will Healy writes, this is giving the company a precious commodity, time.
However, there is a harsh calculus to investing in CHK stock, even as a speculative play. There is a very reasonable chance that the company will not be able to pay back the debt. This isn’t because the company is poorly managed. It’s actually worse than that. The company’s business model no longer works. And that’s why any idea of a comeback looks like nothing more than a dead cat bounce.
The Risk and Reward of Being First Through the Door
At one time, Chesapeake was the second-largest producer of natural gas. And when the fracking boom happened at the beginning of this decade, CHK was in the lead. But when you’re first through the door, you become a target. And that’s where the news got bad for Chesapeake.
Drilling for shale via fracking became an easy target for environmental lobbyists. And not without reason. However, when you’re a one-trick pony and that trick is no longer profitable, you have to find another way to be profitable. For Chesapeake, the company tried to become a “traditional” oil company. But the debt still remained and CHK stock started its slow and steady decline.
And the real problem for CHK is that the debt, which is now nearly $10 billion is still there. And when you’re a company with a $1.86 billion market cap, $10 billion is an alarming amount of debt.
Chesapeake Can’t Run Out the Clock
In a recent article, my InvestorPlace colleague Josh Enomoto used a football analogy that I’ll take in a slightly different direction. Right now, Chesapeake is doing the prudent things it needs to do to extend the game. But that doesn’t mean the odds of winning the game get any better. It just means the company is buying time. And most investors, like fans, are heading for the exits.
I suppose you could look at the stock just about crossing over its 50-day moving average. You could probably justify a short-term trade with a relative strength indicator of around 60. But CHK stock has been a purely speculative play for a long time and it looks to be more of the same.
What’s Next for CHK Stock?
In the case of CHK stock, no news would really be good news. That’s because right now, all the news is bad and getting worse. There is more production coming from the Middle East. Royal Dutch Shell (NYSE:RDS) announced it was taking a major write down. This came on the heels of Chevron (NYSE:CVX) announcing its own write down.
All of these are near-term headwinds for Chesapeake Energy stock. And that doesn’t take into account that we are approaching an election year.
The stark reality for Chesapeake Energy is that they are dealing with too many factors that are completely out of its control. 20 years ago, the company’s venture into shale and fracking looked to be the wave of the future. But sometimes, like laser discs, an idea just becomes outdated. In the case of CHK, the opportunities for shale and fracking are just obsolete.
As of this writing, Chesapeake stock was down over 60% for the year. The volatile oil and gas industry as a whole is down about 18%. There are other speculative plays in this sector. It seems investors would be better off finding those.
As of this writing, Chris Markoch had no position in any of the aforementioned securities.