Should You Bet on Chesapeake Energy's Turnaround?

A recovery is crude oil prices would definitely push a lot of stocks higher. 2015 was supposed to be the year when oil recovers and investors have been hoping for that to come to fruition for a long time. However, instead of recovering, oil prices have plunged further and are near multi-year lows. The last time oil prices were so low was just before the 2008 recession.

While there are many companies that have enough cash to survive the crash, investors shouldn’t expect a revival soon and avoid speculative stocks in the energy sector. One such stock is Chesapeake Energy (CHK). Shares of Chesapeake Energy have fallen from over $20 to under $5 in a span of 11 months, and there’s still no bottom in sight as I expect this downtrend to continue.

Chesapeake Energy was hit badly by the fall in crude and this trend will probably last for at least a few more months.
The crude oil market has been plagued with oversupply and as the recent OPEC meeting confirming that production levels will stay the same, investors can expect crude oil prices to remain low for the foreseeable future.

In addition to cheaper oil, Chesapeake Energy has also been hit by the fall in natural gas prices. Natural gas is also trading near multi-year lows, and like crude, the market is oversupplied. As is the case will oil, natural gas production will also stay high in the coming months and Chesapeake Energy will likely plunge further.

The company also has a huge debt of $11 billion as opposed to a market cap of $2.77 billion, which will put off any potential buyers. Given the mess that the company is currently in, and the weak commodity environment, investors shouldn’t expect a buyout offer.

There are many factors that can push Chesapeake’s stock further down and I see no positive in sight. Hence, investors should stay away from Chesapeake Energy and other speculative energy stocks.

Conclusion

With oil and natural gas prices expected to remain weak, Chesapeake’s outlook looks bleak. The stock has fallen considerably, but it does offer more downside potential, making it a strong sell at current levels. Investors should not buy the stock on the hopes of a buyout because, as mentioned above, the high debt will put off any potential suitor. Given the company’s weak cash position and the plunging commodity prices, I am sure that Chesapeake Energy's free fall will continue going into 2016.
Published on Dec 16, 2015
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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