After losing money the last two years, Chesapeake Energy Corporation (NYSE:CHK) is on pace to flip its bottom line back into the black this year. The 29 analysts who cover the stock expect the company to earn 85 cents per share in 2017.
Those expectations put CHK’s 2017 price-to-earnings ratio at 5.9X, assuming a $5 share price, which is well below that of the market and energy sector as a whole. Based on that metric, it appears that CHK stock is a value play for investors looking to gain exposure to energy, more specifically to natural gas.
But, that’s not the whole story here. Even though Chesapeake Energy will be profitable again soon, there remains a large amount of debt on its balance sheet.
At a recent conference, CEO Robert Lawler stated that the company expects to sell $2 billion-$4 billion worth of debt by 2018. It’s not uncommon for a CEO to be optimistic regarding his/her company’s outlook, and it’s something I definitely appreciate. However, I am not sure how realistic that goal is, given the recent slide in the price of oil. Crude has been sliding for some time now, dipping from prices above $56 per barrel in January to current levels around $45.
In the end, oil is really what it all comes down to for Chesapeake Energy. The correlation coefficient between CHK and crude futures is 0.9. A perfect 1-for-1 correlation is 1. Therefore, as oil falls so does the share price for CHK stock.
I do see oil moving higher in the short term (it’s already bounced off lows below $43 per barrel), but the upside will be limited. And, because of the aforementioned correlation, that means the upside for CHK is also limited. That, combined with the debt headwind, tells me that there is too much risk here, so I’m staying away from CHK for now.
Matthew McCall is the founder and president of Penn Financial Group, an investment advisory firm, as well as the editor of FUTR Stocks and the ETF Bulletin. Matt is currently in the midst of an exciting launch centered around his trademark three-prong investing approach that targets the mega-trends old Wall Street is missing out on. His next-gen investing strategy is delivering enormous profits in stocks and ETFs. Click here for more information on his latest venture.