Why I Am Still A Bear On Chesapeake Energy

| About: Chesapeake Energy (CHK)

I was torn on whether to be bearish or bullish on Chesapeake Energy (NYSE:CHK). However, when I looked at the facts, I knew that I had to be bearish. The stock is too risky for my portfolio. Granted the upside can be huge since Chesapeake Energy's stock price has dropped 45.13% from May 3, 2011 to May 3, 2012. But I still believe that the risk in this case outweighs the reward.

Some of the risks:

  • Chesapeake Energy's earnings per share were $0.76 in Q2 2011, $0.72 in Q3 2011 and $0.58 in Q4 2011. Its earnings per share in Q1 2012 were only $0.18. As you can see, earnings per share has been falling since Q3 2011 at a very fast rate.

  • Natural gas prices have been falling since June 2009. In July 2011, when natural gas was approximately $4.93, Chesapeake Energy's earnings started to decline. In an environment with low natural gas prices Chesapeake Energy cannot compete.

  • Chesapeake Energy is not hedged in natural gas. Even though in 2013, Chesapeake Energy's oil/natural gas production is supposed to be 25%/75%, the company has not hedged any of its natural gas production.

  • From Q2 - Q4 2012 Chesapeake Energy has hedged only 60% of its oil production and in 2013 only 9%.

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  • Chesapeake Energy owes $10.6 billion in senior notes with an average maturity date of 6.4 years.

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The upside of the company is:

  • For Q2 - Q4 2012, Chesapeake Energy is projecting $1.6 billion to $2.65 billion in "budget cash flow surplus."

  • Chesapeake Energy supplies 9% of the gross natural gas supply for the United States.

  • Chesapeake Energy pays a dividend of $0.35 (approximately 2%).

  • If natural gas prices rise over the next couple of years, Chesapeake Energy will be in a great position to profit.

  • Proven reserves of natural gas and oil have been climbing over the past 12 years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.