On Tuesday, the oilfield-services company reported its fourth-quarter results. Included in the news was a $2.2 billion charge to earnings ($1.9 billion net in taxes) resulting from a reduction in shale activity.
“The U.S. shale industry is facing its biggest test since the 2015 downturn, with both capital discipline and slowing leading edge efficiency gains weighing down activity and production,” Halliburton CEO Jeff Miller said during the company’s earnings call.
Halliburton isn’t the only large oilfield-services company getting pummeled by the state of the fracking industry at the moment. Schlumberger (NYSE:SLB) announced last week that it was cutting more than 1,400 jobs and idling half its hydraulic fracturing equipment. This comes after taking a $10 billion charge in 2019.
If you’re a Halliburton shareholder, it’s not good news, but things could always be worse. On an adjusted basis, Halliburton stock still made 32 cents in the quarter, down 22% over last year.
If you’re an owner of CHK stock, this is merely the latest blow for a company that’s tried hard to justify its existence over the past few years.
But as hits go, this one’s right in the groin.
Can Chesapeake Energy come back from this latest piece of bad news? Can pigs fly?
With CHK stock trading at its lowest level since November, I don’t see things ending well for shareholders.
A Boatload of Debt
My InvestorPlace colleague Dana Blankenhorn said it best recently.
“Chesapeake Energy 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,” Blankenhorn wrote Jan. 16.
Do you think?
Here are the headlines from my three most recent articles about the company:
“Deal or No Deal, Chesapeake Energy is DOA” – Dec. 18, 2019
“Chesapeake Energy Stock Continues Its Long Death March” – Nov. 7, 2019
“A Serious Question: Why Would Anyone Buy Chesapeake Energy Stock?” – April 2, 2019
None of them are remotely flattering. The same can be said about my Chesapeake articles from 2018.
In April 2017, I suggested that CHK stock was a HUGE risk at $6.
“Rising energy prices float all boats; investors still need to evaluate the risk of buying CHK stock (instead of buying another oil and gas stock) and its $9.9 billion in long-term debt. Anytime a company’s outstanding loans are greater than its market cap, you’re most certainly playing with fire,” I wrote at the time.
At the time, a barrel of West Texas Intermediate was around $51. Today, that price is about $60, or 18% higher. And yet Chesapeake still can’t generate positive free cash flow.
The fact that it’s been able to refinance $1.5 billion of its debt while also increasing its leverage ratio from 4 times to 4.5 times doesn’t get CHK anywhere close to being out of the woods.
“While the newly announced transactions appear to buy Chesapeake time, we believe asset sales remain critical to the going concern,” SunTrust Robinson Humphrey analyst Neal Dingmann wrote in a December note to clients.
After Halliburton’s latest impairment charge, do you really believe Chesapeake’s going to be able to sell off assets at anything but firesale prices? I don’t think so.
The Bottom Line on CHK Stock
Now, I believe that InvestorPlace readers are a relatively intelligent, hard-working sort.
However, what I can’t understand is why so many seem fascinated with this particular energy company. It’s as if Aubrey McClendon’s ghost is haunting readers, subconsciously forcing them to pay attention to what is essentially a giant train wreck.
Frankly, I’ve given up trying to rationalize what’s good about Chesapeake Energy. If not for the 2,400 employees whose jobs are at risk, I’d say so long and good riddance.
Oh, and one more thing: Halliburton stock, despite the impairment, is a much better way to play the oil and gas industry.
Chesapeake? Not so much.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.