Chesapeake Energy Corp.'s (CHK) fall from grace has been swift and brutal with plenty of controversies along the way. What was once a company trading at $70+ has now turned in to a languishing debt slave, much like a peripheral European sovereign, with a price under $20. Just take a look at the sorry state of the chart below.
(Click charts to enlarge)
(Charts provider: Thinkorswim)
The dwindling price of Nat Gas is used as the most valid scapegoat but in reality a functioning and forward-focused Nat Gas hedge should have cushioned the blow.
The company's unrelenting debt is far too high. Accusations of a rigged board, cronyism, and barely-legal conflicts of interest at the top don't add prettiness to the picture. Volatile revenue and even more volatile net income impedes accurate forecasting, and when coupled with current macroeconomic concerns the probability of a reliable equity price prediction becomes even more elusive.
All in all, Chesapeake is a tough company to value going forward.
This is one reason why we've seen a mass dumping of CHK stock by individual investors and mutual funds in recent times. Throwing the baby out with the bath water any time since early 2011, whilst somewhat knee jerk, would have saved you a lot of money.
If you held on, you're probably now wondering what to do with this black sheep of a stock. Most other equities in your portfolio will have benefited from monetary expansion (QE) but seemingly not this one. Are we at the bottom or is there still some downside to this stock?
Liabilities & Debt
Long-Term Debt: $10.6b - end of 2011 vs $13.1b - end of Q1 2012.
Total Liabilities: $25.2b - end of 2011 vs $29.1b - end of Q1 2012.
Both of these metrics are trending in the wrong direction. Long-term debt is a major concern for Chesapeake and the issue has been in the spotlight of management for some time now. Asset sales have been announced to sharply reduce LT debt but asset valuations and finding a buyer at the right price present challenges in the current climate.
CEO and Director pay has been cut (15% and 20% respectively) but in reality this is more to quell shareholder unrest than to tangibly impact financials. You can always tell that times are tough when the private Lear jet allowance gets cut (as seen in the recent letter to shareholders).
Bridging finance has been arranged to help CHK through its tough period but this in itself presents a myriad of issues including collateral allocation, flow-on effects to announced asset sales, and so on.
I personally don't like the debt situation of this company and as noted it reminds me of a struggling EU periphery nation - Spain or Portugal. If planned asset sales are successful, CHK might be worth a look, but until the rhetoric turns into fact, I won't be satisfied.
Volatility is Rife
Energy stocks are volatile by nature but Chesapeake seems to again be on the extreme end of revenue and net income volatility. Plotting a consistent trend in either metric is near impossible. The company also has a tendency toward surprises and one-off items.
(source: Google Finance)
Now with a freshly exposed management kerfuffle, further surprises and changes at the top are likely - once again distracting focus away from issues of significance such as debt reduction.
Wall Street Opinion
Indications on Wall Street point to a bottoming of the CHK stock price. Deutsche Bank recently upgraded the company from Sell to Hold. Oppenheimer even went so far as to affirm its 'Outperform' rating with a target of $28.
That's a little over the top, especially on the back of S&P and Fitch debt downgrades in recent weeks.
I'm holding off purchasing CHK for the time being but the time to aggressively dump existing holdings is coming close to an end. If you're already in the stock you might as well hold to see if management's plans come to fruition. If they do, an about turn in the stock price could well be in order.Disclosure:
I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.