Chesapeake Energy (NYSE:CHK) has been hammered, with CHK stock falling to new record lows last week. Shares fell 38% last week, closing at 28 cents per share. That’s after bottoming at 20 cents.
There was a point in time — a few years ago — where CHK stock had a chance to turn things around. It needed a bevy of things to go right, but if they did, Chesapeake could turn the corner. Unfortunately, with a weighted balance sheet and with oil prices stuck in a five-year range, it’s not panning out for CHK.
The company’s recent earnings report highlighted as much, which we’ll discuss in a moment. For now, though, is CHK stock heading for a delisting from the New York Stock Exchange?
In short, yes.
In the next few months, CHK stock could find itself trading over the counter (OTC) if its average share price does not find its way north of $1. During the conference call, management stated that it’s exploring the idea of doing a reverse split, with CEO Doug Lawler saying, “While we have stock prices fall into very low levels, we will commence actions to reverse split the number of shares.”
Shareholders didn’t like that plan, sending the stock lower by 30.5% on Feb. 26, the day it reported earnings.
Valuing Chesapeake
Fourth-quarter revenue of $969 million missed expectations by $191 million, as sales sank more than 40% year-over-year. A non-GAAP loss of 4 cents per share beat expectations by 2 cents, but a GAAP loss of 18 cents per share missed expectations by 11 cents.
Production, net income and revenue all fell year-over-year for the quarter. While roughly 70% of the company’s 2020 production is already hedged, the worsening outlook for oil prices is proving difficult for Chesapeake.
Management further announced its intentions to decrease production this year (roughly flat on oil and a decrease in natural gas), as well as decreasing capital expenditures. It’s slashing the latter by roughly 30% for the year, down from $2.25 billion to the range of $1.3 billion to $1.6 billion.
The company’s hope is that, with a reduced capex number, it will be able to turn free-cash-flow positive. That’s a must if it wants to survive, which by how things look now seems rather grim.
CHK stock also increased its debt significantly over the past year. Now carrying more than $9 billion in long-term debt, that’s up from the $7.3 billion in debt from 2018.
Sameer Panjwani of Tudor Pickering Holt said it best: the debt load here is too high. The company is “backed into a corner,” as it needs to generate positive free cash flow or sell assets to raise cash. The latter is rather difficult in this environment, though.
A glance at the balance sheet is concerning too. Current assets of $1.25 billion are significantly below current liabilities of $2.4 billion. Its cash balance is startling low as well.
The fundamental bottom line is simple: CHK stock is struggling right now — big time.
Trading CHK Stock
Let’s look at two charts, the first of which is a daily chart of CHK stock. As you can see, this one has been broken for a while now. The recent market-wide volatility and drop in oil prices hasn’t helped matters. But even before this month’s volatility, CHK has been in breakdown mode.
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You’ll notice that in late December and early 2020, CHK stock tried desperately to reclaim $1, but was rejected both times. On a rebound, investors first need to see if Chesapeake can reclaim 40 cents. Above puts approximately 55 cents on the table, provided the 50-day moving average and downtrend resistance (blue line) don’t knock it back lower.
It’s actually hard to imagine CHK stock taking out the low of 20 cents in the short term, but it’s certainly possible in its current state.
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We pulled this above chart from Statista, with the source being the Energy Information Agency (EIA). The EIA does not project a robust rise in crude oil price for this year or next year. That’s as a glut of supply sits waiting in the U.S. and as OPEC members continue to discuss supply reduction.
While the latter strategy is meant to drive up crude prices, these rallies tend to be short-lived, as other oil producers quickly jump to take advantage of the rise. That helps explain the multi-year range in oil prices — and why companies like Chesapeake continue to struggle.
Speculators may enjoy CHK stock, but neither its fundamentals nor its technicals support the bull case.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
