Chesapeake Energy (NYSE:CHK) stock has become intriguing again. Investors sold CHK off when management raised “going concern” issues. However, recent debt financing deals have bought it more time.
Such a deal may make a recovery in CHK stock possible. However, recent successes in the oil patch have supplied the market with too much oil and gas. Given this reduced pricing, I would not recommend a speculative play in Chesapeake Energy stock.
In the last earnings report, the company called into question its future as “going concern.” At that point, I sold my own speculative position, and it has fallen since that time.
The problem for CHK stock is that the oil and gas boom has become a victim of its own success. The United States now produces so much oil and gas that these assets continue to lose value.
Chevron (NYSE:CVX) just announced that they would take between $10 billion and $11 billion in write-downs in the fourth quarter as a result. One has to assume that ExxonMobil (NYSE:XOM), EOG Resources (NYSE:EOG), ConocoPhillips (NYSE:COP), and other oil majors could follow suit.
The company holds $9.34 billion in long-term debt, a crushing burden for a company with only a $1.5 billion market cap. Falling oil and gas prices and asset write-downs have dimmed the prospects of reducing that debt. Moreover, the move to buy Wildhorse Resources to sell more oil may have backfired as oil prices have also failed to gain traction.
That said, the company has again made CHK stock alluring with the latest debt deals. One deal comes in the form of a $1.5 billion, 4.5-year loan facility that retired an existing revolving credit facility worth about $900 million.
Under a separate debt agreement, it will issue an additional $1.5 billion in bonds. These will come due in 2025 and carry an 11.5% coupon. They will also finance the retirement of some debts at 62 cents and 70 cents on the dollar.
While this appears strange, some of the bonds traded below 50 cents on the dollar, as Dana Blankenhorn pointed out. Hence, these bondholders still benefit. Moreover, these deals buy Chesapeake more time to clean up its balance sheet. All of this has helped take the CHK stock price back up to around 75 cents per share.
Chesapeake Energy Stock Has Become a Gamble
Some stock market detractors refer to investing in equities as “gambling.” In most cases, I object to that view. However, that viewpoint may describe CHK stock accurately. I say this because Josh Enomoto’s football analogy describes Chesapeake’s situation accurately. Not only must they execute a fourth-and-long play flawlessly, factors which the company does not control must also go right.
To be sure, a lot could go wrong for Chesapeake Energy stock. The previously-mentioned asset write-downs do not bode well for the industry. Moreover, the U.S.-China trade dispute makes prospects for selling in China tenuous. The falling cost of renewables could also further dampen the demand for fossil fuels. That push for renewables could accelerate further if a Democrat wins the White House in 2020.
Investors who feel they can prevail amid the above conditions may choose to buy. A 100% loss of one’s investment is a real possibility. However, if Chesapeake’s management has run the right play, and some factors that they do not control go right, the returns on CHK stock could run several multiples above 100%. Still, with the risks involved, this is not a move that I encourage.
Concluding Thoughts on Chesapeake Energy Stock
CHK stock has become a gamble with increasingly longer odds. Falling energy prices and statements from management have cast doubts about the future of Chesapeake.
The company inspired some optimism with new debt financing deals. However, conditions continue to worsen as energy prices fail to gain traction. Moreover, geopolitical uncertainties and the increased viability of so-called “clean” energy solutions could add to the revenue pressure.
If the company manages to clean up its balance sheet, CHK stock will rise exponentially. However, failure could lead to bankruptcy, and external market conditions continue to bode poorly for the company. Given the worsening market environment, I would not recommend a speculative position here.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.