Chesapeake Energy (CHK) was once seen as one of the most promising stocks in the energy sector. However, over the last few years, the stock has experienced calamitous situations including the exit of co-founder Aubrey McClendon along with a massive decline in value.
Chesapeake Energy's internal problems have been compounded by the continual decline in the price of natural gas, as production continues to outstrip demand in the U.S. As such, some investors still believe that even at the current price of about $7.00 per share, and after having declined by more than 70% over the last 12 months, Chesapeake Energy could still fall further in the next few quarters.
Chesapeake Energy has been selling assets over the last three to four years in a bid to streamline its distressed balance sheet, and this has seen it ease the pressure on its balance sheet. However, the company appears to be far from turning things around especially given the fact that its total debt still stands at a staggering $11 billion compared to an enterprise value of just over $15 billion.
Chesapeake Energy's options to increase investments in oil products while cutting down on its natural gas business did appear recently to be a realistic route to recovery when oil prices seemed set to rally back. However, the price of oil has plunged again, making the situation as unpredictable as before, if not worse for the Oklahoma City-based company.
As illustrated in the charts above, it is quite clear that most investors are using the price of oil to determine their decision on purchasing the shares of Chesapeake Energy. Last week's jump in the price of oil triggered a short-term rally in the price of CHK, and the selling seems to have resumed this week again for both crude oil and CHK stock. What seemed to be a realistic support zone for the price of oil now stands to be tested again, with the $45 per barrel mark well within reach.
As such, trading shares of CHK is increasingly becoming as risky as trading crude oil the commodity. One thing is clear, though; the overall trend for CHK is still a downward move and at the moment, there is nothing to suggest that the company could be getting out of this situation any time soon.
Chesapeake Energy's turnaround plan not working as expected
Three years ago, Chesapeake Energy embarked on a program that sought to make it a little bit lightweight by selling a huge chunk of its asset portfolio.
The company's total assets now stand at just over $28 billion from about $45 billion a few years ago. The cash level is also up to more than $2 billion, but at the moment, there is little change with regard to debt-to-equity ratio, which stands at nearly 1.00 even.
This comes following a period last year that saw the company reduce its debt/equity ratio to below 0.5 times. However, since then, the debt-to-equity ratio has increased again to new multiyear highs as demonstrated on the chart above. This increase also coincides with the period that marked the rapid decline in the price of oil.
This seems to have slowed down Chesapeake Energy's plans of becoming a top oil producer following the massive sale of assets. In July last year, the company completed the spinoff of the oilfield services unit, which helped shed $1 billion worth of debt from its balance sheet. According to the look of things, this did not help much in terms of Debt/Equity ratio, and thus far, the plan of becoming a top oil producer appears to be failing miserably.
Declining oil prices are not helping either, which means reinvesting some of the cash received from asset sales could prove to be a tricky business for the company. Chesapeake could be pressured to acquire small oil producers at premium price, which might prove costly in the aftermath, yet given the low oil prices, now could be the right time to get an oil producer at a discount.
Who can invest in CHK now?
From an investment perspective, this won't be your perfect retirement gem. Investing in high yield and stable stocks is one of the best vehicles of saving for retirement, and looking at CHK's return on equity of -45%, this does not rank as one of the best in the market. The company has a decent dividend yield of 3.50%, but given the recent announcement that it won't be paying dividend in a bid to saving more cash, that positive looks certain to be eroded in the next few quarters.
The company's unpredictable future does, however, make it a good stock for speculators. As such those who buy/sell stocks within a short period may find it compelling to speculate with CHK as it continues to mirror the behavior of crude oil price.
Fundamentally speaking, CHK does look cheap, as it currently trades at a P/B of 0.85. However, unless you are the type of investor who looks to buy stocks when others are running, then there is no way the 0.85x P/B valuation would signal value for money. In fact, a more cautious investor would be looking at this as a potential value trap.
Is Chesapeake alone in the struggle?
Chesapeake Energy is not alone in the struggle against falling oil prices. All players have seen a significant decline in revenues and earnings, which has led to most stocks reporting losses. At the moment, ConocoPhillips (COP) is the only stock with a positive EPS $2.20 for the trailing 12-month period among Chesapeake's closest peers.
Anadarko Petroleum (APC) currently has a trailing 12-month loss of $4.97 per share, while BP's (BP) loss stands at $2.08 per share. However, Chesapeake Energy's astonishing loss per share of $33.88 stands out as the worst performer of them all.
This shows that, even though other companies are feeling the heat brought by low oil prices, Chesapeake Energy seems to be lacking ways of minimizing the impact on earnings.
All four companies experienced a quarterly revenue decline of at least 40% in the most recent quarter, apart from BP, whose revenue declined by 36%. Interestingly, Chesapeake Energy has the best operating margin at 13%, but then given the high debt on its books, it is paying a lot of money servicing it and thus the negative impact on profits.
Conclusion
The bottom line is that Chesapeake Energy appears to have failed with its asset-selling plan as low oil prices seem to have ruined any short term projects that could have helped improve revenues. As such, investors would now be wondering what next for the company and whether there is a plan B that could help it return to profitability.
At the moment, it appears as though the plan is to wait and see how oil prices behave in the next couple of quarters. In fact, investors seem to have already pegged the company's stock to the behavior of oil prices, which means it is now trading more like a commodity than a stock.
As such, CHK is not your perfect retirement plan, and neither is it a good value for money despite its cheap valuation in book value terms, but speculators will be on the look out to make the most out of the current uncertainty with regard to way forward.
This article first appeared on
GuruFocus.