This year may seal the fate of the Oklahoma City-based Chesapeake Energy (NYSE:CHK). In July 2008, CHK stock had hit an all-time high of $74. It currently hovers around 22 cents.
On Feb. 26, when Chesapeake Energy released financial results for the 2019 full year and Q4, investors were left with more questions than answers. And they are now wondering if the company will go bust or whether it can still be saved.
Therefore, I’d like to discuss the prospects for the stock so that you can do further due diligence to decide if you would like to bet on a recovery.
As Oil and Gas Price Sink so Does CHK Stock
Chesapeake is an oil and gas exploration and production firm. Energy prices have fluctuated widely in the past two decades. The short-term fortunes of CHK shareholders have always been closely linked to the price of oil and gas.
In summary, higher energy prices help increase revenues, cash flows, and profits. But declining prices make it harder for management to execute strategic plans and for the stock price to go up.
As the 2008/09 financial crisis peaked, like many other energy and oil companies, CHK started falling. The share price attempted recovery several times over the years. However, as energy prices started falling again in 2014, the stock simply tanked. And it has not recovered since.
In recent days, the coronavirus outbreak worldwide has further sent oil prices plummeting and added to the woes of CHK shareholders and management. Uncertainty in broader markets, as well as commodity prices, will likely add to the volatility in stock prices of oil and gas producers.
However, the group’s problems are more than just declining energy prices.
As my colleague Vince Martin has written recently analyzed in detail, “Chesapeake spent the 2000s loading its balance sheet with debt in a huge gamble that oil and natural gas prices would rise… The company’s CEO, Doug Lawler, and his team haven’t done a great job. Last year’s acquisition of Wildhorse Resource Development hasn’t worked out.”
As a results the markets have lost confidence in the company’s prospects.
Management’s Focus Now
Last week, the group released the quarterly and annual results. For the 2019 full year, the group reported a net loss of $308 million and a net loss available to common stockholders of $416 million, or 25 cents per diluted share.
In comparison, 2018 full year numbers had seen a net income of $228 million and a net income available to common stockholders of $133 million, or 15 cents per diluted share.
As of Dec. 31, 2019, Chesapeake’s principal amount of debt outstanding was approximately $8.916 billion, compared to $8.168 billion as of the end of 2018. In other words, the energy company is financially burdened and the outlook remains dismal.
Management has been laying out various steps to come out of this vicious and dangerous spiral. They include a 30% reduction in capital spending and the sale $300-$500 million worth of non-core assets. The proposed asset sale is likely to help pay off debt. However, the volatility in oil prices may make this plan hard to achieve fully, and the balance sheet may not improve enough to give a positive push to the stock price.
The website now says that the group’s “strategic priorities include reducing debt, increasing margins and balancing capital expenditures with cash flow from operations.” In 2020, the emphasis will also be to invest in the highest-margin opportunities.
For me, one has to read carefully between those lines. Is the deeply indebted driller issuing a covert warning that there will even more pain to come soon?
And that may be why the stock market seems to be pricing in an eventual bankruptcy.
Bottomline on CHK Stock
Stats show that one’s odds of winning the lottery are slim. For example, the odds of winning the Mega Millions jackpot are about 1 in 302.6 million and the odds of winning the Powerball jackpot are 1 in 292.2 million.
So if you are thinking of investing in a lottery ticket in March, you may also consider investing in CHK stock.
You could, for example, buy into the current share price. Or if you are experienced in the options markets, you may consider buying an OTM LEAPS call option that expires in January 2022.
Unless you are willing to take a chance on this high risk/high return stock, it is important to remember that CHK is a beleaguered stock that should not possibly belong in most retail portfolios.
I expect the next few months to show whether management will be able to negotiate the choppy waters and avoid a default in 2020.
As of this writing, the author has no positions in any securities mentioned.
