We explain why Chesapeake Energy doesn’t appear to be a long term investment opportunity
Having been dropped to lower levels of $1.50, Chesapeake Energy Corporation (NYSE: CHK) stock has now soared up to around $4.82. Its Year-to-Date (YTD) return has been appreciable, i.e. of 9.43%, but the recent performance is worrying as stock has declined by 10% in the last five days of trading. Apart from stock performance, we explain why Chesapeake is a poor long term investment option.
Being an energy company, its performance is heavily linked to energy commodity prices, which are beyond its control. The company is realizing lower revenues on the back of lower crude, natural gas and Natural Gas Liquid (NGL) prices.
Earlier in March 2015, Chesapeake’s realized value of oil was around $44.33 per barrel, but this year the situation worsened as it now stands at $29.34 per barrel this year. Similarly, natural gas realized prices stood at $2.92 million cubic feet (mcf) back in 2015, and now it’s around $1.75 mcf. As a result, the revenues are being consistently depressed. In March 2015, its revenues were $3.128 billion whereas in the same period this year, it has dropped to $1.953 billion.
The commodity prices had soared in July this year, but proved to be very short term and soon began to decline in July. Moreover, the future doesn’t appear to be much brighter on the back of a weakening supply demand imbalance.
Another key issue is the debt burden. As of 1Q 2016, its total liabilities amounted to $10.953 billion. Although, there’s no short term maturity due, the company has to honor $1.625 billion payments by the end of next year. Considering its poor cash position and high cash burn rate, it seems difficult for the company to manage its debt burden. The company has the option of $4 billion credit facility, but their liquidity appears to be a real concern for investors.
Hence, the long term prospects for the stock are weakening with deteriorating commodity prices.