In 2008, Chesapeake Energy (NYSE:CHK) looked like a winning bet. Oil prices hit record highs, natural gas prices spiked to near-record levels, and CHK stock was flying high, punching past $65 that summer. Even as recently as 2014, there was hope that the company’s big bets on natural gas and oil production would pay off handsomely, and CHK was trading over $30.
Since then, Chesapeake has been in free fall. In a world where oil and gas prices continue to slide, and global warming is adding urgency to a movement to phase out hydrocarbons as quickly as possible, CHK has been reduced to a penny stock.
Adding to the misery of CHK’s shareholders, recent accidents at Chesapeake facilities have resulted in worker fatalities, lawsuits, and negative headlines.
The World Is Turning Against Hydrocarbon Energy
Global energy consumption trends are not favorable for companies like Chesapeake that are focused on hydrocarbons.
With the fight against global warming gaining momentum, a push is on to reduce reliance on oil and natural gas. Wind farms are spreading across the U.S., helping to replace natural-gas fired power plants. There’s now enough solar power capacity in the U.S. to power 13.5 million homes, and American solar power is expected to double over the next five years. Investors are turning their backs on traditional automakers and have made electric car maker Tesla (NASDAQ:TSLA) the most valuable automaker in America.
Growing U.S. Reserves
Slowing demand for hydrocarbons is bad news for oil and gas producers like Chesapeake Energy. Making matters worse, the available supplies of oil and gas are also rising. In 2008, the US. had proven oil reserves of just over 20 billion barrels.
By 2018, that figure had more than doubled, topping 45 billion barrels. The increase of proven U.S. natural gas reserves was just as dramatic, as they rose from 250 trillion cubic feet to over 500 trillion cubic feet during the same ten years.
The combination of the accelerating transition from fossil fuels and increased supply is putting downward pressure on prices. Natural gas prices were over $15 per MMBtu in 2008, when CHK stock was at its all-time highs. Gas currently trades for $1.90 per MMBtu. When CHK stock was around $65 per share, the price of crude oil was in the $164 per barrel range; today it sits at just over $51 per barrel.
Making Headlines for the Wrong Reasons
As if Chesapeake wasn’t in enough trouble, the company has made national headlines this year because of accidents at several of its facilities.
The first took place on Jan. 29, when one of Chesapeake’s oil wells in Texas exploded. That incident killed three workers, injured a fourth, and has already resulted in lawsuits. On Feb. 8, a tank ruptured at another Chesapeake facility in Texas. The force of that blast damaged nearby properties.
The Bottom Line on CHK Stock
Investment analysts have mixed thoughts about Chesapeake’s 2020 outlook. The analysts polled by CNN Business have an average rating of “hold” on CHK stock with a median 12-month price target of 75 cents. However, the number of analysts advocating a “wait-and-see” approach is barely higher than those with “underperform” and “sell” ratings, And at least one analyst think CHK’s shares will be worthless within a year.
The idea of buying a stock worth $65 just 12 years ago for 50 cents per share can be tempting. There have been big spikes by CHK stock during that time, and it could happen again. Anything is possible. But are you willing to bet on it?
No matter how you look at Chesapeake’s performance over the past 12 years, or how you read global energy and U.S. energy trends, the future looks grim for the company. As InvestorPlace columnist Matt McCall points out in his analysis of Chesapeake: “It neither benefits from corporate leadership nor from industry conditions.” Throw a pair of high-profile accidents and the resulting lawsuits and negative headlines into the mix, and an investment in CHK stock is very risky.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
