On the Off-Chance of an Energy Bounce, CHK Stock Is Still a Disaster

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This global shutdown has put unusual strain on Chesapeake Energy (NYSE:CHK). Consequently, CHK stock has descended into a near-death spiral from its highs of $14,000 per share. Well, to be fair that looks odd because of the recent 1/200 reverse split.

On the Off-Chance of an Energy Bounce, CHK Stock Is Still a Disaster
Source: Casimiro PT / Shutterstock.com

Nevertheless, the end is near.

Today we attempt to plot a path to redemption. This is not to say that we expect miracle recoveries but merely light at the end of the tunnel for the bulls.

Many a digit were lost in attempts to catch this falling knife. Unlike the two energy leaders Chevron (NYSE:CVX) and Exxon (NYSE:XOM) stocks bottomed in March and are now 70% above those lows, CHK continues to struggle.

Regardless of what the individual investor thesis is on CHK, there is no denying of its speculative nature. This is not the time to be a hero and go all-in on a stock this risky.

CHK Stock Chart
Source: Charts by TradingView

Chesapeake is not for the faint of heart. Don’t let the post-split higher-value fool you. This may help keep it from de-listing but it should not create the aura of a successful stock.

Meanwhile the volatility persists, but don’t take my word for it. It was recently halted due to excessive volatility. This by definition makes risking money on Chesapeake more trading than investing unless someone wants to plug their nose and buy it for the long term. The long term stock trend is so bad that it raises all kinds of alarms.

The energy sector is in complete disarray, so the blame is not perhaps all on Chesapeake management. Some of its woes are not intrinsic but inherited from the messy macro environment.

There is no near-term hope for energy stocks because the world is still under global quarantine. Some areas are starting to reopen but it’s a tiny sliver.

The simple truth is that if we are not using oil and gas, then companies cannot sell them, which also means that there is no demand for Chesapeake’s services. Investors better hope that management is savvy enough to navigate this unprecedented hardship test before folding. So far they are making moves to better their chances and lower their obligations.

It is hard to make a bullish argument for any energy stock when just last week the headline was that oil went to negative $30. This sounds ridiculous but it was the result of futures contract shenanigans affecting the price of specific expiration dates.

Nevertheless, the whole sector has to suffer from this temporary insanity. The other truth is that we actually still need oil to run the world. And yes, people will go back to work and consume energy. The process may take some time because those brave leaders who are sending people back to work are facing criticism.

Pent-up Demand for Energy Stocks

Even when consumption picks up again, then there is a ton of inventory to work through, so it will take time to fix the supply-demand curve. Last comes the need for exploration of future energy sources. And therein lies the problem for Chesapeake.

Luckily, Wall Street likes to price things in advance, so it is possible that they spike it and its cohorts on the slightest of global reopening headlines. If the bulls can break out from $40 then $60 zones they can invigorate the reparation of the hideous descending trend line.

It recently established a bottom above $9 per share but when the industry is facing bankruptcies, zero is never out of the question.

Once again it is important to point out that this is a scenario with extreme uncertainty, investors must be humble with their opinions. There are no experts today because this has never happened before.

The silver lining is that this depression in energy consumption was scheduled like a dentist appointment by the world governments. Therefore they can UN-schedule it just as fast. While it won’t come back instantaneously in a flash, it should be a short and steep ramp out of it.

This may turn out to be a “U” recovery for oil consumption and price would soon thereafter follow. Risking money on CHK stock is purely speculative unless one has inside knowledge of the company balance sheet and debt obligations.

Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2020/04/energy-bounce-chk-stock-disaster/.

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