Chesapeake Energy Corporation (NYSE: CHK ) is in an interesting position. Chesapeake stock has lost tremendous value over the past few years due to the oil price crash. Now, the stock is at a crossroads.
What does the future hold? Will Chesapeake stock stall out here at $4 and wither away into bankruptcy? Will it survive its current state, and oil prices remain high enough, so that it not only recovers but soars into a multi-bagger? Or will INTC stock dither around in a trading range for a few years?
I think there's a long road ahead. I also think Chesapeake stock is speculative but should offer opportunity for a nice trade and possibly a multi-bagger over the long term.
Things look pretty good in the near term as Chesapeake has grown revenues by 43% to $3.7 billion through the first nine months of 2016. It even managed a profit of $465 million, improving from a loss of $106 million.
Production is increasing and is up to 100,000 barrels in Q4, and likely higher in 2018. Not only that, CHK has hedges in place, with over 80% of Q4 gas production hedged, and about 60% of oil production.
The primary issues for most energy companies that are not massive legacy operators are debt and cash flow. Debt at CHK is almost $10 billion. It should be reduced by selling off some assets, but that's still a huge amount of debt for a stock with a market cap of $3.5 billion.
The cash flow situation is ugly. CHK burned close to $900 million last year and may hit a billion dollars this year. The good news is that some kind of asset sale will happen. I don't know how much there will be, but I'm guessing $2.5 to $3 billion. That will relieve the cash flow situation and allow CHK to pay down some debt.
Chesapeake's cash flow problem is actually more serious to me than the debt issue. CHK paid some $300 million in interest in the first nine months on revenues of over $8 billion. Also, CHK does not have any debt mature until next year, when only some $390 million is due, and $850 million in 2020.
Also remember that CHK produces natural gas as well as shale oil. It's not just a shale producer. While Chesapeake stock makes a profit when natural gas exceeds $3.00/mcf, and prices crumbled to $2.60 in December, they are back at $3.05 now. They are predicted to go as high as $3.50.
Oil prices need to exceed $60 for CHK stock to have long-term growth. Fortunately, oil prices are on the rise.
So, CHK just has to keep pushing forward. Shale is back in business, and now it's a matter of using what acreage it has to produce as efficiently as possible.
Bottom Line on Chesapeake Stock
Chesapeake stock put in multiple bottoms around $3.50, and it now trades around $4.10. I think there's very little downside here. There is resistance at the 50-day moving average of $4.56. So I might consider opening up a trade here, sell a bit at $4.50, and see if it goes higher. I'd also set a stop loss at $3.45.
If things turn around completely and oil prices stay high, and if cash flow improves to its previous levels, Chesapeake stock could return multiples from here.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he had no positions in any stock mentioned. He has 22 years' experience in the stock market and has written more than 1,600 articles on investing. He also is the Manager of the Liberty Portfolio . Lawrence Meyers can be reached at mailto:firstname.lastname@example.org.
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