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There Really Is Nothing to Prevent CHK Stock from Trending Lower

Todd Shriber

Things may change, but barely more than a month into 2020, it’s clear that traditional energy stocks are under immense pressure and that includes the already downtrodden Chesapeake Energy (NYSE:CHK). Even though CHK stock experienced a nice rally in December, it wasn’t nearly enough to shake the stock out of what had become a lengthy slumber.

There Really Is Nothing to Prevent CHK Stock from Trending Lower

Source: Casimiro PT / Shutterstock.com

Moreover, the coronavirus outbreak has crippled energy commodities in the early innings of 2020, but even if that wasn’t an issue to contend with, Chesapeake has headline risk of its own to contend with.

At the end of last month, a Chesapeake well in Burleson County, Texas blew out, initially killing two workers. Unfortunately, a third has since been added to that list and while it’s not immediately clear if he was a Chesapeake staffer, the incident occurred at one of the company’s wells.

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So barely more than a month into 2020, Chesapeake stock is down more than 38%, bringing its 12-month loss north of 81%.

Somehow, Chesapeake, which closed at 51 cents on Feb. 4, has yet to announce a reverse split. This seems to be an inevitability because it has been several months since Chesapeake closed above $1, indicating it’s just a matter of time before the New York Stock Exchange tells the company it’s in violation of the exchange’s price requirements.

Cheap for a Reason

Even if a reverse split is forthcoming, all that is an artificial price-inflating mechanism. It’s certainly not an improvement for Chesapeake’s challenging underlying fundamentals. As a Florida State study confirms, a reverse split is “a negative informational event.” Other academic research confirms reverse splits rarely turn out well for investors.

For the 1,600 reverse splits that occurred between 1965 and 2001, the split stocks lagged their peers by 15.6% in the first year, more than double in year two and a whopping 54% in the third year, Barron’s reports, citing research by professors at Emory University and New York University.

Looked at another way, Chesapeake stock can be reverse split to infinity, but that’s not going to change the natural gas market. The U.S. continues producing natural gas and oil at record levels and, fortunately, there is a vibrant export market for crude and liquefied natural gas (LNG) because domestic consumption growth of those fuels is slowing.

The Annual Energy Outlook 2020, recently published by the Energy Information Administration (EIA), confirms that the mix of domestic power sources is increasingly diverse and increasingly open to renewables, such as solar and wind.

Costs for renewables are declining, making those alternatives more compelling for environmentally-conscious power providers and consumers. As EIA notes, the high cost case for renewables is essentially out the wind and as a share of the broader energy mix, fossil fuels will gradually decline over the next three decades.

These are the type of seismic shifts that can spell doom for some industries or, at the very least, some companies in those industries. So it’s not a stretch to say that Chesapeake is trying to recover at the wrong place at the wrong time because it’s trying to rehabilitate itself with a product (natural gas) for which users are embracing alternatives.

Bottom Line on CHK Stock

I’m not saying Chesapeake is going to file for bankruptcy protection or disappear over the near-term, but I’ll say this: if market observers are worried about Exxon Mobil’s (NYSE:XOM) ability to generate cash, I wouldn’t want any part of a significantly flimsier energy name.

Chesapeake may be worth a glance for active traders that can make decent profits on small moves and have the time to monitor positions. If you’re a long-term investor looking for value in the energy patch, look elsewhere or just consider renewables.

As of this writing, Todd Shriber did not own any of the aforementioned securities.

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