Chesapeake Energy Is Just a Dead Cat Bouncing

Typically, I like to find unique angles regarding today’s hot investment topics. But for beleaguered Chesapeake Energy (NYSE:CHK), I don’t have anything original to offer. No matter what your perspective, you can’t ignore the dire situation the energy firm finds itself in. Even if you’re taking the speculative bullish position – which of course very few are – everyone acknowledges the dangers of betting too heavily on CHK stock.

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Source: Casimiro PT /

You’re not going to find me adopting the contrarian position here. But you might find it curious that in the midweek session, CHK stock closed up by a double-digit margin. That’s not necessarily a fluke occurrence.

Just recently, oil prices on Thursday reached their highest point since March, according to a Reuters report. Indeed, “black gold” is presently enjoying a triple-pronged catalyst: lower-than-expected U.S. crude inventory, a so far successful implementation of OPEC-led production cuts, and growing demand as governments worldwide have started relaxing restrictions on people’s movements.

Better yet, Chesapeake’s native U.S. market will likely provide further upside catalysts for oil prices. As you know, most states have started reopening their economies to various degrees. But a notable number of states are only implementing regional reopening initiatives. According to the New York Times, they include the western coastal states and New York.

Currently, this is a huge drag on the broader economy. There’s a big difference between Wyoming reopening – no offense to any Wyomingites – versus energy-hungry California. But it’s also a longer-term opportunity for CHK stock and its ilk.

As these core states open back up, a robust surge of demand will enter the market. Nevertheless, I don’t think it will be enough to save Chesapeake Energy.

CHK Stock Was Hurting Well Before the Troubles

Lately, I find myself getting frustrated with the mainstream media’s attempt to manipulate math. We’re hearing so much talk about certain industries recovering from their March lows and oil is no exception. But the media tends to isolate their comparisons to only the recently recorded troughs.

If we compare oil prices to where they were in the beginning of the year, the situation doesn’t look so much like a recovery, but instead a minor mitigation of a disaster. Go back several years and you’ll start to see a trend. Oil prices peaked in the early 2010s decade and they don’t appear to be making a comeback to those levels anytime soon.

This is incredibly problematic if you’re buying CHK stock on the hopes of a recovery. Yes, oil prices are recovering, but only against their recent lows. Against any other comparison within the last 15 years, you won’t come away with an optimistic assessment.

Even if oil prices substantively recovered, so what? The oil markets are a game of musical chairs. It’s a reasonably safe bet that sector giants Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) will have a seat. CHK stock? That’s not a gamble … that’s throwing your money away.

Right now, we’re seeing oil stocks rise in anticipation of the consumer economy returning. For instance, more people flying would equate to higher oil demand.

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Source: Chart by Josh Enomoto

But if you compare CHK stock to jet fuel prices, you’ll notice that long-term waning demand for jet fuel has coincided with weakness in Chesapeake shares. So if travel demand “recovers,” jet fuel will likely only recover to just before pre-pandemic levels.

As you can see, that wasn’t sustainable for CHK. Why would it be sustainable in the new normal?

So Many Unknowns for Chesapeake

Contrarians might point out that consumers will likely travel en masse in their personal vehicles rather than flying. Thus, investors shouldn’t ignore the robust automobile traffic demand that’s already rising across the U.S.

I won’t disagree with that. For many metropolitan areas in California, for instance, they looked like ghost towns. Therefore, some semblance of the old normal will represent a nice lift for energy firms.

But specific to California, we don’t know when powerhouse cities like Los Angeles will reopen. And the longer such cities stay shuttered, the more they risk severe economic damage.

Let’s not forget the big one – jobs. Over a nine-week period, nearly 39 million Americans filed for unemployment benefits. Current trends suggest that millions more will file over the next several weeks. Until most consumers feel comfortable about their employment situation, travel volume overall will remain deflated.

Thus, while many catalysts are potentially available over the horizon, energy companies need patience to actualize them. But that’s another problem, isn’t it? Because the one thing that Chesapeake doesn’t have is time.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.

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