Chesapeake Energy Stock Goes to DEFCON 1

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In a post I wrote for InvestorPlace on Feb. 4, I covered three reasons to stay away from Chesapeake Energy (NYSE:CHK). At the time, the shares were trading at the distressed level of 52 cents a share. But of course, the situation has gotten even worse since then. Consider that CHK stock is now at 15 cents a share with the market cap at a mere $315 million.

This Reverse Split Will Do Little to Improve the Outlook for CHK Stock 

Source: Casimiro PT / Shutterstock.com

Of course, one of the reasons for this epic implosion has been the depressed natural gas market, which is currently saturated. It also does not help that the current winter season is warmer than usual.

Here’s what Chesapeake CEO Robert Lawler said on the latest earnings call: “The second half of the year was marked by rapidly falling commodity prices, particularly for natural gas, a trend which continues today, causing a much softer commodity price outlook in 2020.”

Next, there is the stunning collapse of the price of crude oil. It looks like Russia’s Vladimir Putin and Saudi Arabia’s Mohammad bin Salman are in a mano-a-mano fight. The result is that there was a disaster with the OPEC meeting — and Salman has gone on to stir up a price war.

It’s a Mess

It’s true that both parties may come back to the table and patch things up. But this could take a while – and OPEC deals can be shaky anyway. Besides, the crude oil market is already oversupplied and there is the dampening of demand from the coronavirus from China.

According to the International Energy Agency, the forecast is that global purchases will fall by 90,000 a day, which would be the first drop since the financial crisis. And this may prove to be too optimistic.

Now Chesapeake has been aggressive in cutting back on the cost structure. For this year, the company is forecasting a reduction of more than 10% in Lease Operating Expenses (LOE) and G&A (General & Administrative) expenses for 2020 for over $100 million. There will also be a decrease of 30% in capex.

What’s more, Chesapeake is exploring asset sales. Yet this strategy could prove ineffective as the valuations in the sector are quite low and there is little appetite for risk. Let’s face it, banks will probably be very hesitant in providing financing for new deals.

Bottom Line on CHK Stock

With the shares so low, I can see why it may be tempting to take a flier on CHK stock. The company still has a strong asset base, extensive distribution, and there continues to be positive cash flows – at least for now. But if energy prices remain at these levels, there will be enormous strain on the company’s finances. And yes, there is even buzz that bankruptcy could be in the offing.

Take the following from Bill Zox, who is the chief investment officer of fixed income for Diamond Hill Capital Management, in an interview with MarketWatch.com: “There is a certain subset of energy companies like Chesapeake that will not survive.”

Now this does not mean a bankruptcy is inevitable, but it is still a reasonable risk given the harsh environment. For me, if investors are looking for deep value opportunities in the oil space, it is best to focus on those companies with fortress balance sheets, such as Exxon Mobil (NYSE:XOM), Royal Dutch Shell (NYSE:RDS.B) and Chevron (NYSE:CVX).

Tom Taulli is an Enrolled Agent and also operates PathwayTax.com, which is a tax advisory and preparation firm. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2020/03/chesapeake-energy-stock-goes-to-defcon-1/.

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