Can Chesapeake Energy (NYSE:CHK) stock ride out the current headwinds facing the energy sector? It’s doubtful. For well-capitalized companies in the space, things are tough. But in the case of Chesapeake, a better word for the situation is “distressed.”
In other words, bankruptcy remains a high possibility. Burdened by high debt and affected by low energy prices, chances are great that the game is over for CHK stock. Shares may be off their 52-week low of 12 cents per share. But that’s all relative. With the stock currently trading for 17 cents a share, valuation still implies an equity wipe-out.
Some contrarian investors may see opportunity for massive gains in CHK stock. Sure, if the company can avoid a Chapter 11 filing. But given low cash reserves relative to debt, and negative cash flow, I just don’t see this happening.
There’s a difference between recklessly going against the crowd and a shrewd contrarian bet. In the case of Chesapeake, it’s more the former than the latter. With energy stocks in a generally bad place right now, I don’t see a wise opportunity. Instead, I see a risky speculation.
Chesapeake: Between a Rock and a Hard Place
The troubles for CHK stock started well before the recent macroeconomic headwinds — before the novel coronavirus hit America hard. Before an oil price war and decreased demand impacted energy prices. In short, poor performance has dragged this company for years.
As I’ve previously discussed, Chesapeake’s cumulative loss over the past four years was $2.9 billion. While it has posted some years of profitability, the company remained cash flow negative within that timeframe. While not an ideal scenario, this wouldn’t be such a problem if it had the means to weather such choppy waters.
But in Chesapeake’s case, it was the opposite. Burdened by billions in debt, the over-leveraged energy company destroyed shareholder value. In mid-2015, shares traded above $15 per share. By the start of 2020, where were shares trading? Under $1 per share.
Another negative factor for CHK stock has been depressed natural gas prices. While also involved in crude oil exploration and production, natural gas remains its bread and butter. Trading above $4.50 per British thermal unit (BTU) in late 2018, prices cratered to around $2 per BTU by the end of 2019.
As a result, Chesapeake’s issues compounded. Add in the recent crash in crude oil prices, and the continued decline of natural gas, and it’s clear the energy company faces long-shot odds of getting out of this without a bankruptcy filing.
With just $6 million in cash, versus $9.4 billion in total debt, the company is now working with restructuring advisors. Sure, much of the company’s debt doesn’t mature until a few years from now. But, will the company have the cash flow to service this debt in the meantime?
Too many questions, not enough answers. In short, there’s no clear reason to buy CHK stock, even if it trades for mere pennies.
Energy Sector Is a Bad Place for Bargain Hunting
With the stock market starting to rebound after the coronavirus-driven selloff, I agree now’s a great time for bargain hunting — in most situations. While I see screaming buys in the fintech, tech and healthcare sectors, energy is not a place you want to explore. Even if energy stocks have hit new 52-week lows.
Simply put, energy stocks in general look terrible. Yes, using trailing metrics, their valuations look cheap. Applying other fundamental analysis, many energy stocks trade below the net value of their assets. But these metrics are looking backwards, not forwards.
The odds are on the side of dividend cuts, guidance revisions and write-downs of long-term assets. Energy stocks may look “cheap,” but only in the rear-view mirror. Until oil and gas prices rebound, there’s little reason to buy energy stocks in today’s market.
That’s especially true for over-leveraged names like CHK stock. In an environment where even blue-chip energy stocks like Exxon Mobil (NYSE:XOM) look risky, why rack your brain trying to find upside in weaker, more speculative names? It just doesn’t make sense.
When investing, I like to keep things simple. Certain “megatrends” offer long-term potential for your portfolio. Unfortunately, I don’t see Chesapeake Energy on the winning side.
Bottom Line: Avoid CHK Stock
Even when energy prices were strong, Chesapeake saw years of unprofitability and negative cash flow. Now, with the sector on the brink, the chickens are coming home to roost.
I can’t put it into simpler words. Don’t buy CHK stock. When blue-chip energy companies are facing questionable prospects, prospects for weaker energy names like this are more dire.
Save yourself some time, and consider better opportunities instead of this “dead man walking” stock.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
