2 Oil & Gas Stocks To Buy Now Instead Of Chesapeake

| About: Chesapeake Energy (CHK)

This week was very bad for Chesapeake Energy (NYSE:CHK) and it deserved every bit of pessimism it received. There has not been much good news making its way towards Chesapeake, and there is very little reason to think this will change. At least not in the near future. CEO Aubrey K. McClendon did wonders for the company during its peak years, but now I imagine shareholders wish they had never heard of him.

Since closing on April 17, Chesapeake stock prices have dropped 22.5%. This has been due to McClendon's $1.1 billion private loan coming to light. Needless to say, shareholders are not at all happy with the CEO leveraging private loans through Chesapeake's Founders Well Program, and have taken up a class action against the firm. Investors are suing to ensure that any damages that occur are relegated to the defendants and not the individual shareholders or the company.

The class action against Chesapeake covers any shareholder who purchased stock in the company between April 30, 2009, and April 17, 2012, as this is the time frame for McClendon's massive loan. As a consequence of these loans, Chesapeake is now liable to service about $1.2 billion in costs associated with wells it had to sell to pay off McClendon's massive debt in the first place.

Not surprisingly, Chesapeake's directors stripped McClendon of his chairman's post and are conducting a review of his personal transactions involving Chesapeake, such as corporate jet travel. The SEC plans to join the party and has said it intends to investigate McClendon's conduct as well.

With all this commotion, its volume of trading drastically increased, pushing it into oversold territory. This sometimes allows for bullish investors to purchase the stock when it's low, allowing the increase in stock price and dividend yield to increase the overall yield of the stock. In Chesapeake's case, I am not sure this is one of those situations.

Aside from the McClendon fiasco, Chesapeake is in a bad spot financially.

Due to the rock bottom price of natural gas, Chesapeake has been unprofitable for some time, relying on great financial decisions to maintain profits. Unfortunately for Chesapeake, its financial wizardry could only pay off for so long, and it now finds itself in a tenuous situation, having to sell off assets. Specifically, it posted an unexpected $71 million first-quarter loss and is expected to run out of money next year. Adding to the problem is an extra $1.4 billion in previously unreported liabilities that will come due in the next 10 years.

To deal with this situation, Chesapeake has to take a $3 billion unsecured loan currently at an 8.5% interest rate. It needs to take out this loan since a cash short fall would be hugely detrimental to the development of oil and gas wells that it desperately needs. On the plus side, this is only a short-term loan that it expects to pay off by the end of this year, hopefully limiting the interest expenses that will accrue.

On the negative side, Chesapeake will repay this loan with the proceeds of an asset sale it will hold later this year. This year alone, Chesapeake expects to sell as much as $11.5 billion in assets. That it has to sell assets to keep afloat makes me very cautious, as it plans to sell oil fields in west Texas and New Mexico. Since natural gas is selling for next to nothing, selling off oil fields does not seem to make sense, unless one has to sell off oil fields.

The problem is that Chesapeake cannot maintain profitability in its natural gas division with prices as low as they are. Thus, if it wanted to sell off natural gas wells or equipment, it could not command much money and would likely find a limited amount of interest. But oil is much more profitable than natural gas, thus there are many buyers for its oil fields. Unfortunately if Chesapeake sells oil fields, it will likely face even larger obstacles to profitability. This is not a good position to be in.

To make matters worse, it expects to have to sell an additional $9 billion by the end of 2013 to keep from running out of cash. Only one week ago, many analysts affirmed a 'buy' rating. I am curious if they would stand behind that rating today.

Its largest competitor, Exxon Mobil (NYSE:XOM) has been doing significantly better. Two weeks ago, it announced a deal with Russian firm Rosneft to drill for oil in the Arctic. This week, Norwegian firm Statoil (NYSE:STO) followed Exxon Mobil's lead. These firms will likely reap huge rewards, as this area of the Arctic has been virtually untapped to this date. To quantify it, Exxon Mobile has invested $500 billion in this venture and Statoil's deal is worth up to $100 billion. These are the first two large investments in the region, and I expect many more. You can expect with investments this large that both companies believe they will be receiving huge returns on these investments.

Another competitor that is leaving Chesapeake in the dust in Chevron (NYSE:CVX). Chevron has been signing new deals at a rapid pace, and this week was no different. First, it signed a deal to sell 1 million tons of liquefied natural gas to Japan's Tohoku Electric for the next 20 years. With this deal, Chevron is continuing to position itself as one of the largest liquefied natural gas producers. That's not all, at the end of the week Chevron announced that it, along with Royal Dutch Shell (NYSE:RDS.A), won a public bid to develop shale gas fields in the Ukraine. These fields are very lucrative, as it is estimated that they will provide about 10% of Ukraine's power by 2020.

If you are looking for a sound investment, this is not it. I would chose Exxon Mobil or Chevron over Chesapeake these days, minus the fact the stock prices of these two competitors are significantly higher. Even for a bullish investor, Chesapeake seems risky. With the likelihood that it will have to switch leadership during a large asset sale and rough waters, Chesapeake prices will probably continue a slide. The question is, when will it stop? Unless it can neutralize the McClendon fiasco quickly, I doubt it will be any time soon.

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