Chesapeake Energy (CHK) Stock: Things Are Getting Grim

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Chesapeake Energy Corporation (NYSE: CHK)

Recently, I’ve been laying out quite a few warnings about Chesapeake Energy and why this stock has huge downside potential. Well, there’s more to add to that warning once again. Recently, the company released its earnings for the second quarter, missing expectations. At the end of the day, this is yet another sign that things are quickly going from bad to grim for the company. Today, we’ll talk about what we saw from earnings and why CHK may not have what it takes to weather the current storm.

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CHK Reports Troubling Earnings Results

As mentioned above, Chesapeake Energy recently released its earnings results for the second quarter. Unfortunately, these results proved to be a miss by a wide margin. Here’s what we saw:

  • Earnings – In terms of earnings CHK released relatively disappointing results. During the quarter, analysts expected that the company would generate a loss of $0.11 per share. However, the company produced a wider-than-expected loss at $0.14 per share.
  • Revenue – Unfortunately, revenue wasn’t any better. During the quarter, analysts expected that the company would generate revenue of $1.91 billion. However, revenue for the quarter actually came in at $1.62 billion.

The results listed above continue to validate my bearish opinion on this stock.

The Company Is Drowning In Debt… Negative Earnings Can’t Last Forever!

In my opinion, one of the biggest troubles for CHK is the fact that they have so much debt. In fact, the company is sitting on nearly $11 billion in debt. Now, debt is understandable; just about every company has some. However, $11 billion is a massive amount of money.

Now, Chesapeake Energy does have some time to pay off this debt. However, a large amount – $1.625 billion in fact – will be due by the end of the year 2016. With the company producing losses quarter after quarter, paying off this debt means borrowing more money! This money will likely come from their $4 billion credit facility. However, the rate of borrowing and large losses simply can’t last forever.

The Oil Market Isn’t Enough To Sustain The Company

At the end of the day, Chesapeake makes its money in the oil and natural gas space. Unfortunately, this space isn’t doing very well at the moment. The truth is that overwhelmingly high supplies, mixed with poor global economic conditions leading to low demand, are keeping the price of oil incredibly low. At the current levels, CHK is going to have an incredibly hard time making it to profits.

Unfortunately, conditions in the oil market simply don’t seem to be improving. At the moment, US rig counts are climbing every week. In fact, this is the fifth week we’ve seen consecutive gains in the figure. The increasing production around the world is only adding to the global supply glut. This, in turn, will likely keep oil prices low or even send them further downward in the long run.

This is a hard time for all companies in the oil and energy sector. There will be plenty of companies that survive the storm and stick around for the long run. However, when it comes to CHK, I simply don’t believe that it will be one of those companies. As oil conditions continue to deteriorate, the company will continue to generate losses. This will increase the debt load over time, and, at some point, this will all become too much. So, once again, I urge you, if you are invested in CHK, do your research and weigh the risks!

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What Do You Think?

Where do you think CHK is headed moving forward? Join the discussion at TalkTRENDZ!

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