Chesapeake Energy Corporation (NYSE:CHK) stock climbed a whopping 151.6% in the past month. But even after the giant surge, the stock is still down more than 65% compared to where it was at a year ago. So, does CHK stock still have a chance?
Why CHK Stock Still Has a Chance
Well, as an oil and gas company, the ups and downs of Chesapeake in recent years shouldn’t really come as a surprise. WTI crude had some fantastic sessions in the past several weeks, but it is still down more than 60% compared to its 2014 high at more than $100.00 a barrel. And the story is similar for natural gas.
While the mess in the oil and gas sector is yet to be over, Chesapeake Energy has been making progress.
Because of the current commodity price environment, Chesapeake is focusing more on shorter cash cycle projects. This means the company’s capital will be put towards more completions and less drilling. Its total completion spending is expected to account for around 70% of the company’s total drilling and completion program in 2016. (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.)
Moreover, Chesapeake is making a sizable cut to its capital expenditures. For 2016, total capital expenditures are expected to be between $1.3 billion and $1.8 billion. At the midpoint, it would represent a 57% reduction from 2015.
Earlier this year, the company announced asset divestitures of $700 million, which is expected to close by the second quarter of 2016. It also said that it’s targeting an additional $500 million to $1.0 billion in asset divestitures this year.
In the oil and gas industry, debt problems have become a major concern for investors. But Chesapeake has made solid progress addressing the problem. In 2015 and 2016, the company made open market debt repurchases, which resulted in removing $2.2 billion of debt from its books.
Buying back its debt also generated $41.0 million in principal savings for the company. For the first time since 2006, Chesapeake’s total debt has been lowered to below $10.0 billion. Going forward, the company will also have more breathing room from the $38.0-million reduction in annual interest payments.
The Bottom Line on CHK Stock
If the momentum in commodity prices keeps going, Chesapeake’s outlook could improve further. But then again, it’s not easy to predict where oil prices are going next. Luckily, there is limited downside to Chesapeake. In 2016, the company had a 56% hedge on oil and a 58% hedge on natural gas.
As Chesapeake streamlines its operations and improves its balance sheet, it could have a major turnaround in the near future, and so could CHK stock.