For holders of Chesapeake Energy (NYSE:CHK) stock, this has definitely been a year worth forgetting. It was downright awful. CHK stock price has tumbled about 60% this year. While the energy sector has been under pressure most of the year — despite the rally of the stock markets — Chesapeake Energy stock was still a negative outlier in the sector.
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But unfortunately, this is nothing new for CHK stock. Just look at uitsaverage annual return for the past five years: roughly 45%.
Basically, the best thing about CHK stock is that, well, the company will likely not go bust! If anything, the recent low set in November – 56 cents per share – may actually represent a bottom.
That’s because the company has struck a favorable debt restructuring deal with its creditors. CHK issued about $1.5 billion in new bonds, with an 11.5% coupon. While that was not cheap, it was the company’s lenders agreed to reduce the principal by 30% to 35% and liberalize other terms. The deal will probably stave off an imminent fiscal crunch. As a result of the agreement, CHK stock price surged, almost hitting $1.
Yet I still think investors should be cautious about Chesapeake Energy stock. The fact is that CHK stock is far from healthy.
The Company’s Serious Issues
Consider that CHK still has a huge debt load. It owed $9.1 billion (as of Sept. 30), compared to its market cap of roughly $1.7 billion. Moreover, it has to pay annual interest of close to $700 million. So even after the debt restructuring, CHK will still have trouble meeting its obligations.
Next, CEO Robert Douglas Lawler has been overly optimistic. Sure, it’s good to take a cup-half-full approach. But he’s overpromised too much. For the past few years, Lawler has been predicting break-even cash flows but he has yet to deliver. What’s more, for three consequence quarters, the company has missed analysts’ average earnings estimates.
But the biggest problem facing CHK stock is the terrible market environment. It really does look like the fracking revolution is coming apart – and quickly. According to the Wall Street Journal, the industry may produce 15% less oil and natural gas than forecasted.
It appears that fracking wells peak more quickly than traditional approaches. That may be because they are often placed too close to each other.
Regardless of the reasons, companies will need to invest more to sustain their production. The value of existing leases will also fall, weighing on balance sheets.
In light of all this, it should be no surprise that banks are getting more cautious about lending to fossil fuel players, putting an even bigger squeeze on companies like CHK.
Besides, some recent moves by major oil companies indicate that the sector is having problems. For example, Royal Dutch Shell (NYSE:RDS) and Chevron (NYSE:CVX) have announced major write downs of their portfolios. This appears to be only the start of the oil sector’s reckoning.
The Bottom Line on CHK Stock Price
In the new year, there will be some other wildcards that could negatively impact CHK stock. One is the election, which could easily cause volatility in the markets in general. Energy stocks could be especially vulnerable, as the country’s future energy policies will be uncertain Then there is the continued strides by alternative energy sources, which are getting more competitive with oil and gas.
But of course, the key for CHK stock price is the oil and gas. But unfortunately, there are few signs of a major bull move by either commodity, as their supply-demand dynamics remain fairly unfavorable.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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