More Bad News for CHK Stock
Chesapeake Energy Corporation (NYSE:CHK) stock plummeted more than 50% to $1.50 on February 8 on fears the oil producer may be heading for the incinerator. Yet CHK stock survived the massive sell-off and has since surged more than 200% as oil rallied.
Now if anyone is thinking of picking up shares of Chesapeake Energy in their 401K, I wouldn’t advise this. CHK stock should only be considered for aggressive day traders.
The move of the April West Texas Intermediate (WTI) oil to above $34.00 helped to attract buying back to the oil patch. However, I think it’s a fool’s rally and I see the upside limited to around $40.00 this year.
In the case of CHK stock, I would be selling into strength.
If you are eyeing and hoping the stock can bounce back to its 52-week high of $16.98, take a pause and have a clear mind. CHK stock probably has more of a chance to trade to zero.
CHK Stock Is a Dog with Fleas
The company’s balance sheet has a crippling $10.76 billion in debt and a mere $825 million in cash.
Chesapeake will need to refinance its debt and it will be at higher interest rates due to the junk rating on its bonds, which have been plummeting in price due to fears of a bankruptcy on the horizon.
The thing is that the debt load is much more than the current value of the company’s oil assets. This is not a good formula for turning around.
The company said it would be in deeper trouble if oil prices do not recover. That assessment was in November 2015 when WTI oil was trading at around $39.00.
If you believe oil prices will recover to $40.00 or above by the end of this year, then Chesapeake may have a slim chance to survive, but the longer oil prices stay at the $30.00 range, the higher the probably CHK stock could struggle.
The oil chart does seem to display a bullish double bottom. However, unless there are major production cuts by OPEC and other non-OPEC countries, such as Russia, I simply don’t see oil moving that much higher, given the inventory glut and depressed demand.
U.S. oil inventories continue to mount due to the serious drop in demand.
Baker Hughes reported the number of operating oil rigs in the U.S. plummeted to 400, down 70% from the same time last year. The fear is that should oil prices rally higher, we could see more rigs coming back online and that’s not good.
My thinking is that WTI oil will stay south of $40.00 per barrel this year.
For Chesapeake, it will be trying to starve off the creditors and pray really hard that oil prices rally to above $40.00 and higher by 2017—otherwise, it will be lights out.
The Bottom Line on CHK Stock
Much of the easy profits in CHK stock have been made. Further gains will be more difficult and will totally depend on the direction of oil prices.
If anyone really wants to trade a stock like CHK stock, it might be best to consider doing so via call options. Using this strategy will limit your risk to the premium paid.