Chesapeake Energy Unable to Rally Even After Positive News

Chesapeake Energy (CHK) is an oil and natural gas company. The shares have seen a precipitous fall from a 2008 high of $74 per share to an intra-day low of around $10 in December. The stock recently has been flatlining around the $15 level.

So should you be bargain hunting here on CHK? In my analysis, NO, not over the short-term. I see several reasons for possible further downside in the shares, most related to its recent failures to react positively to attempts by pundits to rally the stock, and possible balance sheet/management risks. If a downtrending stock is unable to rally on good news or positive spin by analysts, there is likely possible downside ahead in my view. I see short-term downside potential to the $10 area and possibly lower.

Let's examine a few recent events which failed to cause any significant rally in the shares and/or are possible negatives:

1. The shares were upgraded by a major brokerage house on December 8th and have failed to hold any gains or make headway from that upgrade -- they have slid back down to try to hold support at the 15 level.
2. CHK shares have also been bullishly hyped repeatedly by a major investment website recently, as well as mentioned positively by a prominent TV pundit from a major financial news channel several times -- yet the stock is failing to rally, and keeps testing the 15 level.
3. Debt - The company has $14.53 Billion in debt, according to my data, which shows a Debt/Equity ratio of 0.87. The company previously announced that it may issue 50 million shares to shore up its capital, which could be up to a 17% dilution in the shares -- they have also had asset sales and major cuts in capital spending. Further dilution of the shares and debt re-structurings are possible.
4. The powerful CEO of the company, Aubrey McClendon, was forced to dump virtually all of his shares in the company to meet a margin call, losing a paper gain of as much as $1.92 Billion, according to my statistics. This may indicate a lack of good financial planning for his personal financial management, and raises questions as to the prudent financial management of the company's assets.
5. The stock has not been rallying despite the seasonal effect of a cold Winter that is often thought to help natural gas related companies -- whether this axiom is true or not, the fact is the stock is not rallying, and looks to want to break sharply below 15, in my view.

click to enlarge

Bottom Line: Combine the possible risks with non-positive reactions to attempts to rally the shares -- and you have a recipe for a stock that may face another run from the short-sellers. While a downward plunge in CHK shares is not certain, in my view the shares are acting "sick" and look likely to head lower.

Disclosure: Moby Waller has recently recommended a bearish options trade on CHK to his Advanced Options Strategies subscribers.

Comments

[bfras921:]

so the guy is a self admited short and says we should sell chk because the ceo got a margin call

its amazing the dopes alpha publishes

nowhere did this author mention

1. the 1.25 in cash they got in dec from stat oil
2. 1 billion in conv debt that was coverted to equity
3. 2 billion in cash flow in EACH OF the next 2 years
4. Year end tax selling
5 10 b in carry that chk
6. the 1.25 finding costs in 2009
7. the fact based on PROVED reserves alone chk is worth 15 and no value being ascribed to the rest of the assets
8. the pending vpp transaction9 rumors of a pending takeover by B&P and OXY

Yes, the stock could be weak in a light trading weak with year end tax selling but imho is an easy double next year

2008 Dec 24 08:01 AM

[bfras921:]

Never take advice from a guy name Moby

2008 Dec 24 08:02 AM

[Mathman Pro...:]

Look at a 5 year chart of ticker GOLD compared to ticker CHK. As of July 2008, CHK was up over 250%, and GOLD was up 250% over those 5 years as well. Now, GOLD is still holding at close to 250% return, but CHK is down about -15% from 5 years ago. So either GOLD is about to plummet (I doubt that due to the absurd increase in money supply) or CHK will soon start closing the gap, after all commodities have value too, even though they are tied more closely to industrial demands which are currently down, and they also hedge well against inflation. Looking forward, CHK may have some downside in the short term, but anyone shorting this stock should consider investing with Madoff.

2008 Dec 24 09:28 AM

[long_on_oil:]

McClendon bought the stock when it was over $40 a share and he did not expect to lose money on the deal so what does that tell you? This company will never sell out below $50 a share. The problem with the American investor is his short sightedness. I want it and I want it now. Long term is a week and the distant future is a year. The world population is constantly increasing and every person in the world uses commodities of all types in various amounts. Therefore all commodities will eventually seek a higher plane. Oil and natural gas will lead the way. Don't be fooled by these short term dips. These corrections are needed to smooth out the upward movement of the prices.
Oil at $150 brought economic disaster but oil at $75 is acceptable and 5 years from now oil at $85 will be acceptable and on and on.

2008 Dec 24 09:32 AM

[viva:]

Bear markets return stocks to their rightful owners.

2008 Dec 24 09:50 AM

[longoil:]

long_on_oil

I like your pseudonym.

I think CHK and other gas producers will do well in the new year if Obama delivers on his energy independance program.

1) If he enacts stricter EPA standards regarding coal generated electricity, NG is a winner

2) If he continues the misguided corn ethanol subsidies, NG is also a winner since fertilizer is made from NG.

3) If part of the big three auto maker bailouts become conditional on the production of some NGVs, gas is a winner again.

4) If T. Boone Pickens plan is resurrected, then gas is winner.

2008 Dec 24 10:11 AM

[bindlepete:]

HeY Aubrey was a victim on his own hype although unquestionably he has brought in a lot of gas. I am sorry he was called out and hope that it doesn't affect his commitment to the Company.

The problems are that oil has tumbled, that the gas industry is bordering on glut and most of all the expansion of growth in sales and use has been passive on the part of the industry itself. I

It reminds me of the coal industry that was displaced by oil in the chemocal feedstock industry because the coal folk refused to put any money into research as to use of their product. They gave the chemical industry away.They got fat just saying you want coal? just back up to the tipple what you do with it is your business.

Natural gas is doing little more with their compressed gas vehicles. Why are they not converting the gas to methano or dimethyl diesel ? for transportation use? Stupid I suppose. The Chinese are spending a fortune in the far more difficult conversion of coal to these two transportation fuels.

Go with M-85 and the glut will dissappear and CHK will be back on track to develop and sell its resources.

2008 Dec 24 11:34 AM

[blu:]

Any company paying over $25K per acre in lease bonuses for Barnett Shale reserves and then spending the amounts of money they do drilling ... is a loser!!

Just a West Texas oil producers viewpoint.

2008 Dec 24 01:19 PM

[January Thaw:]

If you pick up CHK you have to be willing to outlive the shorters...

2008 Dec 24 05:01 PM

[January Thaw:]

Things ought to get very interesting when the E&P's have to prove
up reserves. Then we'll see what we're dealing with.

2008 Dec 24 05:05 PM

[Urbane Gori...:]

No need to beat up the author for an opinion. However, this is a Natgas company and Natgas is way down. Compare it to the EOG chart and you get the same action. Further, CHK has reduced capex as have all the gas and oil companies. Eventually, our world will come out of this
recession/depresiion/B... we will be using Natgas again. Unfortunately, there will be a bcaklog of drilling to be done and Natgas will jump. The gas companies will rocket...

jegan

2008 Dec 24 05:10 PM

[Alamo:]

Natural gas has a bright future.

Texas A&M's Chemical Engineering Dept has developed an economical technology to produce high octane gasoline and sulfurless diesel directly from natural gas. This process has been licensed to Synfuels Corp. in Dallas. (Apparently, Marathon is in the start-up phase of a similar facility for converting nat gas into gasoline in San Antonio)Synfuels currently is building a nat gas to gasoline plant in Qatar.
.
If the new congress and the Obama administration actively push CNG and subsidize CNG re-fueling facilities along the Interstate highway system, we will be driving (and trucking) on it sooner than later.

Subsidizing residential CNG "Phill" units to an affordable degree can also drive the demand factor.

Since all of these will create job opportunities for Americans and utilize an American fuel resource in line with the Obama administration's avowed intention to end our dependence on foreign oil and create millions of jobs, natural gas will likely be favored.

2008 Dec 24 11:49 PM

[andy b:]

Everyone I know in my town (northcentral Wisconsin) has gas heating bills running $100 to $200 for the last month and winter has just started. That gas is coming from somewhere, any backlog will eventually be depleted and the price sure hasn't gone down from last winter.

I bought CHK at $16.25 and if it keeps getting lower I'll keep buying while it's low because it will eventually go back up. I'll be waiting to pounce on the author's anticipated $10.00 price per share.

I'll go with billf922's assessment. It almost seems like the analysts are trying to scare the little guys out of the markets with bad reports of gloom and doom so the big guys can swoop in and recoup their huge losses from their greedy and stupid ways of allowing others to do their investing for them.

2008 Dec 25 03:10 PM

[BrotherMaynard:]

RE: the first two comments

Never take advise from people that drop ad hominems and react with emotion. both of those traits have no business with investing.

CHK has some serious issues if nat gas continues its downtrend. Sub $5 and $4 start to inhibit the effectiveness of hedges. We're in the midst of the worst economic recession in decades. Keep in mind nat gas fell into the $2 rage during the last recession. And that recession wasn't even consumer led. Industrial production falloff is already muting the effects of the colder winter, coupled with serial overproduction by e&P's, like CHK, will mean heavy oversupply and much lower prices are inevitable. CHK also has debt covs that get triggered at certain ebitda/debt ratios...with lower prices, ebitda will be impaired...so unless you know when/how those covs are affected, please do not invest (short or long) in this stock. Its too risky and there are plenty of other cheap investments without the balance sheet risk.

2008 Dec 26 12:19 PM

[Mmarrkk:]

Maynard: pls tell me more about "Sub$5 and $4 start to inhibit the effectiveness of hedges." I don't understand exactly what you are talking about. I know hedges but don't quite get your point.

2008 Dec 30 03:15 PM

[rbagby:]

It's amazing how badly this guy Moby missed the mark on CHK

Jan 06 10:41 AM

[Moby Waller:]

On Jan 06 10:41 AM rbagby wrote:

> It's amazing how badly this guy Moby missed the mark on CHK
>
>

It's amazing how well rbagby's comment was a contrarian indicator on CHK -- topped out near 20 that day, currently below 14.

I actually was looking at a Straddle on CHK for my subscribers, but ended up going for the Bearish direction, for various reasons. I certainly saw big potential for a volatile move in either direction, but chose the down side. It rallied from 15 to almost 20, now currently below 14. If you had been long the straddle, you could have sold out the Call side on the move up and ended up most likely with a "free" Put that is now worth serious premium.

Jan 20 02:58 PM