5 Reasons Why Chesapeake Shares Should Be Sold

| About: Chesapeake Energy (CHK)

Chesapeake Energy Corporation (NYSE:CHK) shares have been under pressure due to weak natural gas prices, but more recently, investors have been selling because of internal issues. Chesapeake is a leading natural gas company in the U.S., with interests in the Barnett Shale, the Haynesville and Bossier Shales, the Fayetteville Shale, the Marcellus Shale, and the Eagle Ford Shale. Recent developments have made it difficult for many investors to justify continued investment in the company. The stock is now just pennies away from the 52-week low, and it looks like the shares could be making new lows soon. Here are five reasons why investors should consider selling Chesapeake shares:

  1. It was recently disclosed that CEO Aubrey McClendon had obtained loans and interests on Chesapeake wells. This news came as a surprise to many shareholders, and it gives the appearance that the CEO could have potential conflicts of interests. It also makes it appear as if the board of directors and the company are possibly being used to serve the interests of the CEO, rather than shareholders.
  2. Standard & Poor's just announced that it cut Chesapeake Energy's rating to "BB" and lowered ratings on two affiliate companies: Chesapeake Oilfield Operating LLC and Chesapeake Midstream Partners L.P. This could raise borrowing costs for the company in the future. Furthermore, it placed all these entities on Credit Watch with negative implications. Standard & Poor's stated: "Turmoil resulting from these developments could hamper Chesapeake's ability to meet the massive external funding requirements stemming from its currently weak operating cash flow and continuing aggressive capital spending."
  3. The SEC just announced a new inquiry into the CEO's dealings with Chesapeake as a potential conflict of interest between him and the shareholders. This could lead to a more serious and full investigation of the company in the future.
  4. One professional energy trader thinks that Chesapeake shares could drop into the single digits. On CNBC's "Fast Money" show, Dan Dicker said that "this is the kind of development that could easily erode shareholder confidence." I think he is right, and inquiries from the SEC and potentially the board of directors could lead to more problems down the road.
  5. Natural gas prices remain incredibly low, and it could take a long time for the supply glut to improve. Many shareholders might see the uncertainties of the natural gas prices and the internal dealings at Chesapeake to be very undesirable and sell the stock in the coming weeks and months.

Here are some key points for Chesapeake:

  • Current share price: $17.56
  • 52-week range: $17.03 to $35.75
  • Earnings estimates for 2012: $1.43 per share
  • Earnings estimates for 2013: $2.71 per share
  • Annual dividend: 35 cents per share, which yields 2%

Encana Corporation (NYSE:ECA) is a Canadian-based oil and natural gas company. These shares have been under pressure due to low natural gas prices, but the stock may have bottomed out. The company recently reported earnings that beat analyst expectations by a wide margin. Earnings were 33 cents per share, while analysts expected just 2 cents, for the first quarter of 2012. The stock trades below book value, which is $22.17. With all the uncertainty at Chesapeake, investors might want to consider shares of Encana instead.

Here are some key points for Encana:

  • Current share price: $19.74
  • 52-week range: $17.02 to $34.85
  • Earnings estimates for 2012: 37 cents per share
  • Earnings estimates for 2013: a loss of 15 cents per share
  • Annual dividend: 80 cents per share, which yields 4.5%

Data is sourced from Yahoo Finance.

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

Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

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