Even for $3, Chesapeake Energy Corporation stock is still too risky

Despite the rise in oil prices, Chesapeake energy (NYSE:CHK) remains confused. Stock of the Cheka, which came to $ 8 per share in 2016, once again plunged. It is about 3$, falling to 25% in 2018 and 46% in the last 12 months.

Unfortunately for CHK investors in securities, things are likely to remain rough, at least for a while. The company has a massive debt load, natural gas prices are moving in the wrong direction, loyal shareholders are starting to sell, and analysts are downgrading the company left and right. Add it up, and there’s a good reason to avoid the stock of the Cheka, even after its recent decline.

Still No Cash Flow

It is remarkable how much time the Chesapeake did not generate positive cash flow from operations. For the energy company, once the well is up and running, you generally hope to get a decent return on their investments. This did not happen the Chesapeake yet.

Starting in 2012 consumed $ 1 billion or more of money transactions every year. The user sees that the indicator will fall this year, but still expect the company to burn several hundred million dollars.

Preserve longleaf throw in the towel

The asset Manager reserve longleaf partners announced in its just released client Fund a letter that he liquidated his stake in CHK shares in the last quarter. It’s a bad sign for the Bulls on the stock.

Preserve longleaf has been a long time champion of the stocks of the Cheka. It was one of the three main enterprise since at least 2013. In the last quarter, it sold its position on the stock CHK 65% of the losses, according to the letter. In it, preserve longleaf wrote that control: “the increased value of one share, where they could control it, but in the current and future effects of the Perm production of associated gas long-term gas price futures littered with their great efforts.” Just look at the United States natural gas Fund, LP (NYSEARCA:UNG) graphics, in the long run to see that the Chesapeake against.

Simply put, Chesapeake could not escape from falling prices for natural gas. Fracking has changed North American energy landscape forever. Excess natural gas is simply too low prices for high-lever operators such as Chesapeake to prosper, especially if they don’t have enough exposure to oil, where prices are much stronger.

Downgrade Analyst

Analysts at wall Street as a group was quite a lot of patient when it comes to CHK shares. But even they start to lose confidence in the turnaround story.

Citigroup, for example, nailed CHK shares with a nasty downside last week. This is to reduce the CHK stock to “neutral”. More painfully, he cut his target price from $5/share all the way down to $2, which is another 30%+ decline from current prices. Why he has reduced the target stock price of CHK so much?

Citi cut its forecast for 2018 of natural gas prices to $2.75/MMBtu, compared with $3, in addition to chop him 2019 forecast $3.35 to $2.60.

Chesapeake management continues to talk about how they reduce their costs in the future. And they do a good job on this front. However, other manufacturers make such saving moves. As a result, industry in a race to the bottom, where the level of production is too high, but nobody wants to stop producing in the first place. The level of production, prices continue to fall.

This treadmill, and the Chesapeake could not run fast enough to achieve profitability. It is worth also thinking about how much the fall in natural gas prices raised prospects for Citibank. 2018 its modest cut and a significant reduction in 2019 led to the model of the company shows CHK stock loses 60% of its value against previous assessments. What he says about excessive leverage and risky nature of the stocks of the Cheka.

In addition, last month Bob Brackett from Bernstein cut its Outlook on CHK shares. He lowered his target price to $2.50 and issued a rare “sell” recommendation. He said that the Chesapeake needs to be $3.25 or higher prices of natural gas, in order to succeed. Considering where prices are now, he said that “it is difficult to imagine a stable macroeconomic environment that will allow Chesapeake to prosper”.

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More Asset Sales

In line with previous guidance, the Chesapeake considerably indebted your balance, making huge bets. Unfortunately, the price of oil and gas collapsed, leaving the company with lots of debt and not much income as expected. For many years the company is trying to unwind the damage caused by his previous adventures.

The easiest way to strengthen the balance sheet through the sale of assets. And that Chesapeake was doing. But here’s the RUB: in a down market natural gas, it is difficult to find applicants willing to pay fair prices for property in Cheaspeake. There are many bankrupt or on life support, exploration and production companies. Players who have cash can afford to be choosy in purchasing real estate Chesapeake or other distressed companies.

CEO Doug Lawler said recently that the company will not sell assets indiscriminately. Lawler said: “We are not desperate to sell assets, […] we know what it takes to improve the balance, but we don’t need to sell anything in the near future.” However, the debt load remains at $ 10 billion and interest rates/availability of credit has become more difficult, Chesapeake will continue to be a seller for some time.

The final verdict on the stock CHK: stay away

I know that CHK stock may seem cheap at $3/share and down from its highs. But the low share price is deceptive. In fact, the company 10 in debt and on the market for almost $ 3 billion cap on the top of this billion dollars. All told, the market valuation of the company, which annually loses $ 1 billion+ cash flow in 2012 to $ 13 billion. This is not cheap. Actually, this is a pretty large speculation on the price of natural gas recovers.

But why should they, at least in the short term? America has huge reserves of natural gas and a ton of desperate energy companies that will continue to make to avoid bankruptcy. The basics here just do not justify trying to catch the bottom on Chesapeake energy stock.

At the time of this writing, the Author held no positions in the aforementioned securities. You can contact him on Twitter @irbezek.

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