There’s no doubt that Chesapeake Energy (NYSE: CHK) is in a somewhat precarious position. CHK stock seems to keep finding new lows on worsening news.
As another InvestorPlace columnist, Vince Martin, noted in his Dec. 20 column, Chesapeake Energy issued a “going concern warning” late last year, essentially saying that it might go bankrupt. And since then, natural gas prices have plunged, while oil price have pulled back about 15%. As a result, Chesapeake stock is back near its 52-week low
But, on the positive side, Chesapeake may have been able to lock in $64+ per barrel oil prices for the rest of the year when they reached that level during the U.S.-Iran crisis at the beginning of the year.
Moreover, natural gas prices could get a boost from higher gas exports at the end of this year or the beginning of next year, if not sooner.
It’s also important to keep in mind that the company could be rescued by asset sales. Finally (but importantly) CHK yesterday raised its Q4 production guidance and indicated that its free cash flow would be positive in 2020. Let’s look at each of these potential positive catalysts.
1. Locking in Oil Prices
Although it used to be nearly entirely dependent on natural gas, Chesapeake Energy now generates more money from oil than natural gas. In the third quarter of last year, for example, it reported $613 million of revenue from oil and just $390 million from natural gas.
And it turns out that oil production companies can lock in high oil prices for at least three years. So Chesapeake could, theoretically, have locked in oil prices of nearly $65 per barrel for the rest of the year.
In Q3, CHK posted a loss of 6 cents per share, and it sold its oil at an average price of $58.18 per share. It’s a good bet that, if it was able to lock in oil prices of nearly $65 per barrel for 2020, it will be profitable for the year.
2. Natural Gas Prices Could Be Boosted by Exports
Europe uses a great deal of natural gas for heating purposes, and it gets a large amount of that natural gas from Russia. But both the U.S. and Europe are looking to wean the EU off Russian gas by having the U.S. export more gas to Europe. With Europe and the U.S. looking to find a way to heal the trade rift between them, Europe could very well, like China, look to pacify President Donald Trump by agreeing to buy much more U.S. gas.
Speaking of China, the country agreed to buy $18.5 billion of U. S. energy, primarily oil and natural gas in 2020 and $33.9 billion in 2021. It looks like Beijing may not meet those goals because it hasn’t, so far, removed tariffs on U.S. energy.
But Beijing could remove those tariffs soon as it looks to convince the Trump administration to eliminate the remaining tariffs on Chinese imports. And it’s a pretty good bet that, if Trump gets reelected, China will meet all or most of its energy import commitments in order to keep the president pacified.
Further, it looks as though natural gas prices in China and the developing countries of Asia will continue to climb, increasing the viability of U.S. natural gas exports to those nations.
3. Possible Asset Sales
Of course, Chesapeake isn’t the only oil producer that may have locked in relatively high oil prices for a long time during the U.S.-Iran crisis; the big boys like Exxon (NYSE:XOM) and Chevron (NYSE:XOM) may have done the same.
That might have given them the money they need to buy oil and natural gas assets from struggling producers like Chesapeake at decent prices. And the large oil companies may want more oil and natural gas capacity to meet the high overseas demand that could be coming in the next year.
By selling assets, the company could shore up its balance sheet, reassuring its lenders and investors. Consequently, Chesapeake could get its interest rates lowered and its stock moving in the right direction.
4. Good Q4 News
Last week, Chesapeake Cnergy provided Q4 production guidance of 476,000 to 478,000 of oil-equivalent barrels per day (boe/d). During the same period a year earlier, it produced 464,000 boe/d. Moreover, management indicated that it was on pace to generate positive free cash flow this year.
“Our strong results in the fourth quarter have continued into early 2020 and are setting the foundation for the company to reach free cash flow this year,” said CEO Doug Lawler.
Banks are generally reluctant to push profitable companies into bankruptcy because it’s better for lenders to keep receiving payments than deal with the red tape and headaches of a bankruptcy.
The Bottom Line on CHK Stock
Risk-averse investors should stay away. But, for long-term, risk-tolerant investors who are looking for a speculative stock, CHK stock could be a good play on multiple trends.
As of this writing, the author did not own shares of any of the aforementioned companies.