Chesapeake Energy (CHK) Stock: Avoid It Like The Plague

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Chesapeake Energy Corporation (NYSE: CHK)

Chesapeak Energy Corporation has had a strong run in the market in recent trading sessions. As a result, we’re seeing headlines telling you to add this to your watch list, or that there is tremendous opportunity here. However, there’s quite a bit of short- and mid-term risk in the stock that everyone seems to be ignoring. Today, we’ll talk about the risks, what I’m expecting to see from CHK moving forward, and other opportunities in the sector that have a much better chance of yielding strong returns, in my opinion.

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If You’re Considering CHK, Here’s what You Need To Know

Before investing in any company, it’s important that you take a look at what the company does and the landscape within the sector. In this particular case, Chesapeake Energy is a petroleum and natural gas company. This means that their money largely comes from oil, which creates a huge risk.

When the value of oil heads upward, the profit that CHK generates follows it up. However, when oil declines in price, the company sees declines in profits. At the moment, oil is trading at incredibly low levels. And all signs seem to be pointing toward declines in oil.

Like any other commodity, oil is heavily dependent on supply and demand. While supplies are already far higher than we need them to be, we are seeing a continued increase in production. In fact, in the last week, the number of operating oil rigs in the US climbed again. This is the sixth week over the past seven that we’ve seen increased rig counts. This time, the US added 6 operational rigs for a total of 357 currently. Higher production means higher supply. That’s not good for oil, nor companies like CHK that make their money from the commodity.

Economic Blues Will Likely Weigh Heavy Moving Forward

I find today’s market to be an incredibly interesting topic. The fact that global economic conditions are in such a rough place while we are nearing record highs doesn’t make sense to me. Now, I don’t want to be a doomsday theorist, but something’s got to happen here, and until something big does happen, we’re likely to see continued declines in the global economy. That’s a horrible thing for Chesapeake energy and other oil production companies.

As issues like the Brexit, Asian economic uncertainties, and more continue to pop up, consumers are going to work to spend less money. One of the first places they look to cut costs is oil. Think about it, when we’re not sure if the next dollar is coming, we drive less, turn off lights, change the thermostat a few degrees, what ever we can do to use less energy. This causes massive declines in the demand for oil, leading to declines in price.

The bottom line is that with supply around the world continuing to grow, a current supply glut in place, and growing economic concerns, oil isn’t looking great at the moment. In fact, the outlook is relatively grim. Because CHK makes its money through the commodity, the risk simply outweighs the reward, in my opinion.

Other Assets In The Sector That Have More Positive Outlook

If you want to invest in the basic materials sector, that’s great. There are other assets that will likely yield gains. If not, they won’t be as susceptible to the outlook mentioned above:

  • XOM – If you want to stay in the energy arena, one of the best places you can look is Exxon Mobil. While the company is at the mercy of oil to an extent, it is nowhere near as susceptible to the fluctuations of the commodity as CHK. This is the result of a refining business that covers declines caused by oil. All in all, XOM seems like a strong choice.
  • GEVO – Another place you might want to look is Gevo. The renewable fuels and chemicals company is setting itself up for big gains at the moment. With 2 commercial flights done using renewable jet fuel and plans with regard to isobutanol in gasoline blends, this stock has tremendous upside potential.
  • Precious Metals Stocks – You also may want to take a close look at precious metals stocks. Given current economic conditions, gold and silver are climbing dramatically. This is sending stocks like VGZ, ABX, and AG on strong upward trends. Even if you decided to stick with Chesapeake Energy, these stocks would provide a strong hedge for the losses that are likely to come.

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What Do You Think?

Where do you think CHK is headed moving forward and why? Join the discussion at TalkTRENDZ from CNA Finance!

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