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Chesapeake Energy Offers a Juicy Play to Speculative Investors

Bears are dumping CHK stock left and right, but that will be a huge mistake if natural gas prices rebound

Investing in oil and gas stocks is painful. Investing in natural gas is even more devastating to the average portfolio. Chesapeake Energy (NYSE:CHK), which has been finding new 52-week lows almost daily for the last two years, is no exception. The four-year low in natural gas futures is not getting a lift despite parts of the United States seeing frigid weather.

CHK Stock Is Poised to Benefit from a Likely Oil Rally
Source: Casimiro PT / Shutterstock.com

What might suffering natural gas investors do? CHK stock does not have good value even at a market capitalization below $900 million. So, those holding the stock may not want to bother selling just yet.

Markets are dumping CHK stock as natural gas prices slide even though it does not take much for a monster rally.

Strong Production in Fourth Quarter

Ahead of its quarterly earnings report, Chesapeake Energy posted strong preliminary production results. It met 2019 production expectations of 125,000 to 126,000 barrels of oil per day in Q4. Management constrained capital expenditure levels in the range of $480 million to $490 million.

The firm also pared debt levels by $900 million. It retired the Brazos Valley Longhorn credit facility. Despite shares trading at penny stock status, the chances of insolvency are low. Chesapeake Energy has $1.4 billion in borrowing capacity left. So far, it borrowed $1.6 billion through its revolving credit facility. This year, it has $300 million in debt maturing.

Unfavorable demand and supply dynamics are hurting the natural gas business. But this gas exploration firm may still produce strong cash flow while operating on lower costs. Increasing production lifted cash flow in Q4. In fact, oil production increased by 6% year-over-year. Total net production from its Eagle Ford asset in South Texas reached roughly 104,000 barrels of oil equivalent per day. Powder River Basin in Wyoming averaged nearly 21,000 barrels of oil per day in December 2019.

Chesapeake Energy said that Marcellus Shale in Pennsylvania had “a daily gross field production record of 2.67 billion cubic feet of gas per day set in November 2019 and a net production record for the 2019 fourth quarter of approximately 975 million cubic feet (mmcf) of gas per day.”

CHK Stock Is a Worthwhile Bet

Bearish investors are fretting over falling natural gas prices and are selling CHK stock in the process. But with the stock beat up and closing at 45 cents per share last week, investors will not lose more than that. Markets have bet against Chesapeake Energy over the years and even bet that it would go bankrupt. Now, the stock is in deeply oversold territory.

Between 2017 and 2019, the company posted positive operating cash flow. Free cash flow is negative at the time but not low enough for bankers to worry.

The company’s long-term debt is mostly unchanged in the last three years. So, with a debt-to-equity ratio of 3.1, the levels are relatively good. Considering the falling natural gas prices over the last four years, Chesapeake Energy is getting leaner every quarter. It is cutting operating expenses wherever possible and managing interest payments on debt. And all investors need to profit on their trade on CHK stock is for energy prices to rebound.

Very few analysts cover this company on Wall Street. Those who do did not update their rating on the stock. The 63 cents price target suggests that a rally by a nickel or a dime will reward investors with a double-digit return.

Chesapeake Energy is trading as if it will file for bankruptcy. Yet history shows that this company will fight for its survival, waiting out the plunge in natural gas prices. A brief rebound in natural gas prices will give investors a quick return.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/02/in-penny-stock-status-chk-stock-is-worth-the-speculation/.

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