Chesapeake Energy Corporation (NYSE: CHK)
Chesapeake Energy is a company that has had an incredibly rough time in the market. As of late, however, we’ve seen short-term pushes upward as hopes that this battered company will soar again continue to surface. Nonetheless, it’s important to remember that just because a stock has been battered doesn’t always mean that there’s a strong opportunity. In this particular case, I believe that the stock has far more room to fall. In fact, it could go up in flames as soon as next year, leaving shareholders with little to nothing. Today, we’ll talk about why I have such a bearish opinion on CHK.
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Understanding What CHK Does
Before we get into why I believe that Chesapeake Energy Corporation is likely to fall hard, it’s important that you understand what the company does. As the name would suggest, the company is in the energy sector. In fact, they are an oil and natural gas exploration and production company.
Because CHK is heavily focused on the production of oil and natural gas, it is heavily exposed to spot market prices. As a result, when the spot market prices of oil and natural gas edge upward, the company generates more profit from the products it sells. However, when the prices of oil and natural gas fall, it’s bad news for the company. With low prices, they simply don’t make as much money when selling their product.
Take A Look At The Oil Market My Friends
The reality is that you don’t have to have a career in finance to see that the oil market is struggling. At the end of the day, the price of oil has been sitting around crisis levels for well over a year now. This is the result of a massive supply glut mixed with declining demand. Unfortunately for CHK, since the supply glut became public knowledge nothing, has been done to solve the problem.
In fact, the problem seems to have started to get worse again. At the end of the day, in order for the price of oil to go back up, demand is going to have to climb while supply shrinks. However, oil companies continue to vie for more control of the industry. In fact, we’re seeing increasing active oil rig numbers every week now. That’s horrible for Chesapeake Energy as well as other companies in the sector.
Demand isn’t making the picture any better. In fact, demand for oil is also a major concern. Around the world, economic conditions are concerning and far from improving. No matter where you look, the US, Japan, China, Europe, the UK, you’re going to find economic hardships. When economies take a turn for the worse, consumers look to save money. This means they drive less and do everything they can to reduce their electricity bills. This all plays into the supply glut problem, as demand simply can’t keep up. The bottom line is that the oil market is a grim place to be at the moment. With the vast majority of CHK revenues coming from oil, that’s incredibly bad news for the stock!
This Company Is Literally Drowning In Debt!
A common thought has been that if oil drilling companies take out debt to cover expenses while the market corrects itself, they will do just fine. While this is a very skewed opinion, in some cases, this will work. However, in the case of CHK, debt is something that’s becoming increasingly hard to come by, and is creating a problem as we speak. At the moment, Chesapeake Energy Corporation has a massive amount of debt. As of March, their debts amounted to $10.953 billion!
Of course, there are several years before they have to worry about most of this debt. However, there’s a big chunk that’s going to be due by the end of the year 2016. At that time, CHK will be required to shell out $1.625 billion in liabilities! That would be fine for a company that’s making money. However, when it comes to this particular company, we’re seeing losses!
As a result of the debt payments that are coming, CHK will almost certainly be forced to draw on their $4 billion credit facility – something we’ve been seeing. In the long run, this further diminishes the company’s financial stability, and, with the recent credit downgrade, that’s something they don’t what to do.
The Bottom Line
The bottom line here is that no matter how you slice it, Chesapeake Energy needs a miracle to even stay in the game. Considering the conditions of the energy sector as a whole and the figurative rock and hard place the company has worked its way into financially, oil needs to climb for this company to survive another 2 or 3 years. If asked whether or not I would consider investing in CHK, I would have to say no. Unfortunately, everything seems to be pointing to declines for this one.
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