Chesapeake Energy (CHK) Stock: Time To Abandon Ship

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Chesapeake Energy Corporation (NYSE: CHK)

Chesapeake Energy Corporation is a stock that was battered by energy sector blues. However, the month of July has been an exceptional one for the stock. If you got in at the beginning of the month, you’re likely sitting back and patting yourself on the back for the strong move you made. Well, I’m here to tell you that it’s time to abandon ship! Look at the chart below. The arrows represent the last 2 times that I wrote a post saying that it was time to take profits on CHK!

Chesapeake Energy Corporation CHK Stock Chart

The bottom line, here, is that the month of August isn’t going to be such a good one for the stock. In fact, I’m expecting it to be a horrible month. Today, we’ll talk about why.

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The Oil Market Is Taking A Beating, That Will Transfer To CHK

If you’re going to trade any stock, it’s important that you understand what the underlying company does to generate money. In this particular case, Chesapeake Energy is a company that is driven by oil. While oil doesn’t account for 100% of the company’s revenue, it does account for well over half of it.

Unfortunately, the oil market isn’t doing well and, if things keep going as they have been, it’s only going to get worse. At this point, all hopes of an oil production freeze are all but lost. On top of that, we’ve reached a pivotal time when oil production companies are working to take a more controlling share in the market. This can be seen in oil rig counts. In the United States alone, 15 new active rigs came on line just last week. As economic conditions continue to put a strain on demand, increased production is the last thing we need to see. Nonetheless, that’s what’s happening. If things keep going this way, oil is going to take another massive tumble, and companies like CHK will be struggling because of it.

Earnings Come Out Early Next Month

It can be argued that much of what we’ve seen from CHK over the past month has been unjustifiable growth. Think about it, the oil market isn’t getting any better, and we haven’t seen massive fundamental news from the company itself. Nonetheless, since June 30th, the stock has gained by nearly a quarter.

The reason for the gains are simple. Investors looked at Chesapeake Energy and saw a battered stock. Given that the stock had such a rough time, investors viewed it as an opportunity to get in at a very low price. From there, investor-fueled growth started to happen. This led us to where the stock is today. At the end of the day, CHK is currently an overvalued stock.

This brings us to earnings. On August 4th, the company will be reporting its results for the most recent quarter. Given conditions in the oil and natural gas market during this quarter, I’m not expecting to see much by way of positive news. Since the last earnings report, the company has shed 9% of its value. This time around, we’re likely to see more of the same. Unfortunately, CHK is simply in the right sector at the wrong time.

The Bottom Line

At the end of the day, Chesapeake Energy isn’t a bad company. In fact, years down the line, when the oil and energy sector recovers, I’m expecting that the stock will become a strong pick. However, at the moment, everything seems to be going against the oil industry. Given the current outlook on the energy sector, as well as the current global economic outlook, things simply aren’t looking good. This ship may sail again, but for now, it’s time to abandon CHK before it sinks again!

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[Image Courtesy of Wikimedia]

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