Chesapeake Energy (NYSE:CHK) is the very definition of a “dead man drilling.” The only reason to keep it alive is to try and pay off some of its roughly $9 billion in debt. This is working for its bankers, but not CHK stock investors.
The other analogy that comes to mind is the dead parrot in the Monty Python sketch. You can argue all you like about whether the Oklahoma City-based oil and gas producer is resting, or perhaps pining for the fjords. But its situation is hopeless.
The fact can be seen by looking at one number, its annual interest expense.
In 2016 Chesapeake paid $286 million to service its loans, on revenue of nearly $7.9 billion. Last year it paid about $518 million. In 2020 it will pay nearly $700 million. Revenue is expected to remain under $10 billion.
The company is the very definition of a “dead man drilling.” The only reason to keep it alive is to try and pay off some of its roughly $9 billion in debt. This is working for its bankers, but not its investors.
Most have finally figured that out. The shares fell decisively under $1 each in November and open for trade this morning at about 68 cents each.
Poster Child of an Era
Chesapeake Energy is the poster child for the latest boom-bust cycle in oil.
Chesapeake came to prominence early in the last decade, under Aubrey McClendon, by fracking the Marcellus Shale, a formation in the Appalachian Mountains containing huge reserves of untapped natural gas. It later made investments in nearly all the other big plays of the decade, from Ohio to Colorado to Texas and its Permian Basin.
McClendon himself died in a March 2016 traffic mishap, while under indictment for trying to rig auctions on oil and gas leases. The company has struggled without him, trying to pay down or put off the mountain of debt accumulated during its glory days.
In its latest move Chesapeake did a debt swap of about $600 million in notes with an interest rate of 6.875%.
There are bullish analysts out there who insist management “had a lot of financing options” and that worries of its viability as a “going concern” are overly conservative.
But the price of the latest swap was high. The interest rate on its new notes is nearly 10%. We’re getting close to pawn shop rates. Chesapeake is putting the money into the Eagle Ford oil play in central Texas. The bullish thesis is that if oil prices rise, and if natural gas goes up, and if the new “successful efforts” method of accounting works out, it might make some money.
That’s a lot of “ifs.”
Just in case you were wondering, the U.S. Energy Information Administration on Tuesday raised its 2020 forecasts for West Texas Intermediate and Brent crude oil prices and said it expects to see U.S. crude-oil production reach new records in 2020 and 2021, according to the Short-Term Energy Outlook report.
There is another bullish thesis, that war in the Middle East could save the Texas oil patch.
Here at InvestorPlace, contributor Josh Enomoto calls this “an intriguing but ridiculously risky case.” This is a polite way of saying it’s hopeless. Ian Bezek notes that even higher oil prices won’t help because that encourages production of natural gas for which there’s no longer a market. Flaring, the burning of natural gas at the wellhead, is already at an all-time high.
Chesapeake is said to be the most-owned oil and gas stock on Robinhood, because young plungers have heard the name and think it’s a bargain. These investors are learning a hard lesson. As the risk of a hot war with Iran recedes, so does stock in Chesapeake.
Bottom Line on CHK Stock
Oil has always been a boom-and-bust business. Anyone investing in CHK should already know that.
The boom of the last decade, however, may be the last.
It was driven by the new technology of fracking, but even newer techniques for finding oil mean there are now huge pools being discovered nearly every month. But these finds aren’t being cheered any more.
Competition from efficiency and renewable energy will continue to strangle the global oil patch. Chesapeake is going under.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.