Chesapeake Energy Is on a Path Towards Profitability

Chesapeake Energy [stock_market_widget type="inline" template="generic" color="default" assets="CHK" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] has long confounded investors. Chesapeake remains the second-largest producer of natural gas in the United States, lagging only ExxonMobil in production volumes. Despite this advantage, low natural gas prices have left CHK stock unable to recover.

However, the takeover of Wildhorse Resource Development has made oil a much more important part of the company. It also helps that oil prices have returned to the $60 per barrel level as of the time of this writing. Moreover, thanks to a key technological shift, the U.S. natural gas industry could see a business surge.

Chesapeake could benefit if it can overcome the risks.

Heavy Debt Burden Continues to Weigh on CHK Stock

Though Wall Street expects a modest full-year loss, they expect quarterly profits to return by the end of the year.

Chesapeake stock is not for the faint of heart. The 2014-16 crash in energy prices left the company with a debt burden of more than five times its market cap. Asset sales helped prevent a total collapse. However, since 2016, it has spent most of its trading history as a penny stock. Over the last two months, it has rarely traded above $2 per share.

This comes despite difficult but dramatically-improved conditions. The long-term debt, which once stood at over $11 billion, has fallen to just under $9.2 billion. Investors should note that this accounts for last year’s purchase of Wildhorse to increase its oil exposure.

It had also returned to profitability before purchasing Wildhorse. Though Wall Street expects a modest full-year loss, they expect quarterly profits to return by the end of the year. Furthermore, the company continues to sell off holdings to reduce debt.

However, it is oil prices that constitute the real risk. At current prices, I see no issue with Chesapeake’s return to profitability. It could even prosper should oil go much higher. However, if oil prices crater again, it could leave Chesapeake unable to service its debt.

Natural Gas Exports Could Bolster CHK

Technology may provide Chesapeake with a solution.

In previous decades, exporters could not ship natural gas overseas. Today, ships can carry liquefied natural gas (LNG) across oceans. Thanks to the rapid growth of this new industry, LNG exports rose 35% in 2018 and they have already reached 33 countries. Going forward, the Energy Information Administration (EIA) expects exports to increase by 63% in 2019 and 42% in 2020.

As of the time of this writing, natural gas trades at about $2.40 per 1000 BTUs. But that’s the price in the United States. Look to Europe, and it trades at $3.58 per 1000 BTUs. In Japan, natural gas fetches $9.91 per 1000 BTUs!

It may already affect prices. In Europe, the market valued natural gas at $7.45 per 1000 BTUs one year ago. The price has also fallen in Japan at that time. Despite falling prices, selling overseas can only help CHK stock.

Should I Buy Chesapeake Stock?

In my view, the prospect for natural gas sales in Europe and Asia make Chesapeake a worthwhile speculative investment. Moreover, many analysts, including Morgan Stanley’s Devin McDermott, believe Chesapeake has positioned itself well to pay down debt and sell assets.

To be sure, risks remain. Oil prices could collapse, forcing Chesapeake into bankruptcy. Moreover, even McDermott admits that free cash flow will probably not turn positive until at least 2023.

Still, Chesapeake had paid down about $4 billion in debt between early 2016 and just before it bought Wildhorse. Now with Wildhorse’s oil revenue and more asset sales, debt reduction should resume. Once Chesapeake can stabilize its balance sheet, it should rise well above its current $1.90 per share price.

Will Healy is a freelance business and financial writer based in the Dallas area. In addition to marijuana, energy, and mining stocks, he has also written about real estate, insurance, personal finance, and macroeconomics. In addition to Capital 10X, his articles have appeared on sites such as InvestorPlace, Yahoo! Finance, MSN Money, Kiplinger’s Personal Finance, GOBankingRates, and Seeking Alpha. Will holds a B.S. in Journalism from Texas A&M University, an M.S. in Geography from the University of North Texas, and an MBA from the University of Texas at Dallas. Phone: 416-721-8257. Address: 682 Indian Road Toronto, Ontario M6P 2C9.


Please enter your comment!
Please enter your name here