Chesapeake Stock Has Big Upside
Natural gas producer Chesapeake Energy Corporation (NYSE:CHK) has risen considerably since hitting a year low on Wall Street last February. Chesapeake stock hit a share price of $2.02, losing more than 33%. On March 7, CHK stock rallied to $5.23 per share. Chesapeake has not traded this high since last November. This was before Brent crude oil prices were trading at about $45.00 per barrel—considerably higher than today, even if oil has rallied away from the $30.00 threshold.
Still, CHK stock rose almost 90% in a week. While prices are heading closer to earth, there is reason to suggest that Chesapeake could benefit from similar patterns again. CHK stock has shown that it is highly susceptible to crude oil prices. Last week, oil surged—in relative terms. As many investors were caught by crude oil’s rally, they had to cover their short bets by buying more energy stocks. (Source: “Seadrill, Chesapeake, Linn Energy, Rex Energy: Will the Rally Continue?” Bidness Etc., March 7, 2016.)
Oil prices recovered in the past days due to lower U.S. rig count data and the endurance of the Saudi Arabia-Russia deal to freeze output at January’s level. (Source: Ibid.) The fact that the Russians appear to have held their end of a ceasefire agreement in Syria has no doubt helped in this regard, too.
But there was another important factor—one that investors should not overlook when evaluating energy stocks like Chesapeake…
Oil prices also recovered because of the overall health of the U.S. economy, relative to other economies. The jobs report released last week has confirmed that the U.S. labor market is strong. This signals continued economic growth and casts away the shadows of recession. CHK stock investors can reasonably expect the stock to hit $5.90 or even $6.00 per share if the oil trend continues.
In February, Chesapeake, which has some $10.0 billion in debt, assured investors it would avoid going into receivership and raise the stock price. The bottomless fall in the resources sector has forced many companies to restructure and cut their investments. Yet, Chesapeake stock has delivered higher share values since a month ago.
Chesapeake was once the second-largest natural gas driller in the United States, if not the entire North American continent. In 2008, Chesapeake stock was trading at $66.00 a share. The chances of avoiding bankruptcy, much less of a recovery, appear improbable at best. Chesapeake’s downturn is not unique and it suffers from the overall slump in the entire shale oil and gas sector.
Chesapeake Energy extracts about three billion cubic feet of gas per day, equal to four percent of U.S. production. (Source: “Chesapeake Energy Corporation Provides 2016 Guidance And Reports 2015 Full Year And Fourth Quarter Financial And Operational Results,” Chesapeake Energy Corporation, February 24, 2016.) Should CHK stock go bankrupt, it would cause major repercussions throughout the shale industry.