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CHK Stock May Have Reached Speculator Only Status

It’s hard to believe, but once upon a time, Chesapeake Energy (NYSE:CHK) had a market cap of $21 billion with CHK stock trading around $31. 

It wasn’t that long ago. June 2014 to be specific.

Now trading below $3, it’s got a market cap of $2.4 billion and is laden with $9.4 billion of long-term debt, a whopping 400% of its shrinking market valuation.

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I wouldn’t invest in a stock whose long-term debt was 100% of its market cap, let alone one as highly leveraged as Chesapeake.

CHK stock has been a dog for some time. It’s hard to believe that as recently as Sept. 2017, I suggested it was a speculative buy at less than $4.

“If you’re betting on CHK and can afford to lose the money, I don’t see a problem at less than $4. However, if this isn’t money you can lose, this isn’t a stock for you,” I wrote at the time.

“Not now, probably not ever.”

Nothing’s Changed

Sure, the company’s found a way to push the ball down the road by merging with WildHorse Resource Development (NYSE:WRD).

The $4 billion deal sees Chesapeake dilute the heck out of existing shareholders — WildHorse shareholders can elect to receive 5.989 CHK shares for every share of WRD or they can take 5.336 shares of CHK and $3 cash — while only adding $1.5 billion in long-term debt to its balance sheet.

Controlling 55% of the merged entity, Chesapeake’s made a very compelling case why the deal makes sense including stronger margins, increased cash flow, and annual savings of $1.5 billion over the next five years. 

CEO Doug Lawler believes this is the best way to accelerate the company’s push to become free cash flow positive.

We’ve Heard This Song Before

As far back as early 2017, Chesapeake’s boss was optimistic it could hit free cash flow neutrality by 2018. That hasn’t happened, something the CEO had said would take place with $50 oil and $3 natural gas.

Well, guess what, we’ve hit both of those numbers and no FCF neutrality.

Here’s what I wrote in November about this subject: 

“As Lawler stated in the analyst conference call regarding the WildHorse purchase, it’s likely to happen in 2020 [FCF neutrality], in large part because of its latest acquisition,” I wrote.

“So, without the acquisition, shareholders would have been looking at 2021 for free cash flow neutrality, which tells me that this goal is a rapidly moving target and it’s possible free-cash-flow neutrality might not happen in 2020, despite the CEO’s best guess.”

How are investors supposed to believe anything Lawler says?

They’re not.

Why Do Speculators Like CHK Stock?

Over the past 12 months, CHK stock has traded between a $5.60 and $2.53, a range of 121% between its 52-week high and low. By comparison, Exxon Mobil (NYSE:XOM) has a range of 24% between its 52-week high and low.

In other words, volatility, both up and down, is the speculator’s friend in this instance. And hey, there’s always a chance Lawler’s right about the WildHorse acquisition and CHK stock goes shooting back into double digits on its journey back to $21 billion.

My InvestorPlace colleague Vince Martin said it best in early November when he stated that Chesapeake’s bond prices have been relatively stable, a sign that lenders aren’t overly concerned about the company’s situation.

If you believe energy prices are going higher, CHK provides a risky but potentially rewarding speculative bet.

For everyone else, who aren’t thrill seekers, move on to any other stock but this one, because its Altman Z-Score suggests $0 is a possibility. 

As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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