Why Natural Gas Company Chesapeake Energy is Getting Crushed

Wyatt Investment Research

I own shares of Chesapeake Energy Corporation (CHK) .

And unfortunately, I bought them at just about the highest price they traded this year – and they’ve done nothing but fall since.

But I’m not selling just yet.

If you own shares of Chesapeake Energy – here’s what you need to know.

Chesapeake is still the largest independent natural gas producer in the United States. Exxon-Mobil (XOM) produces more gas, but they’re clearly not a pure natural gas play.

Right now, shares are getting clobbered following news of a recent $4 billion loan Chesapeake took from Goldman-Sachs (GS) , on top of another $1 billion bond offering.

The company now seems to suffer from that death-knell of indebted entities – a “cash-flow problem.”

We’ve heard about cash-flow problems from people like Irish bankers in 2011, General Motors (GM) and Lehman Bros circa 2008…

“Cash-flow problem” seems to be a code-word for “nearly insolvent.”

But wait, there’s more…

Because Aubrey McCLendon, the CEO of Chesapeake was recently asked to step down after borrowing a massive amount of money against his stake in Chesapeake.

Add it all up, and the stock has been (rightfully) slaughtered. I always expect bad news to hurt stocks over the short term.

But as I’ve stated many times, the average investors has a very short attention span.

So I’m not worried about how far the stock has fallen – so much as I’m worried about how likely it is that this company will recover and remain profitable.

The reason I bought Chesapeake is still intact. It’s one of the biggest companies in the natural gas sector – and natural gas is still trading near all time lows. 

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This chart explains why Chesapeake is suffering from cash-flow problems. Natural gas is so cheap that Chesapeake can’t possibly profit from their current production.

That’s bad for Chesapeake – as is the news about Mr. McClendon stepping down.

But that’s precisely the reason you should consider buying Chesapeake. It’s selling for a much better price than even many of the company’s insiders were able to buy it.

Like natural gas itself, Chesapeake is cheaper than it’s been in years.

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So if you consider yourself a value hunter or a contrarian – then you should see this price action as a reason to buy – not sell.

In the meantime, I’ll keep you posted on my personal holdings. 



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