3 Reasons why Chesapeake Energy is a Short

Chesapeake Energy (CHK) is one of the most shorted stocks in the U.S. Amid weak oil and natural gas environment, many investors are betting against the stock. Despite the company’s woes, the stock jumped 10% during yesterday’s market-wide selloff.

The jump was probably a result of shorts covering their position, however I think investors can use the recent spike to short Chesapeake Energy. Although shorting a stock trading under $5 has its complications, I think Chesapeake Energy is worth the effort as the company’s prospects looks dim and here’s why.

Natural gas prices to remain low

Many analysts and investors have a dim outlook of natural gas.
Given the present scenario, natural gas supply is expected to increase in the near future, and given Chesapeake Energy’s high exposure to natural gas, I think the stock will continue its downward trajectory.

Debt

What makes Chesapeake Energy an even more compelling short is the company’s debt. The company has over $11.5 billion in debt as opposed to cash of $3.08 per share. To put into perspective, the company’s market capitalization is under $3.3 billion.

Huge debt doesn’t only add to interest expenses, it also discourages any potential buyers of the company. Considering the company’s debt, I think it is still a safe short candidate.

Oil prices will also remain low

Although Chesapeake Energy doesn’t rely on oil prices as much as it does on natural gas prices, it still affects the company’s stock price. Oil is currently trading near multi-year lows, and whilst investors may be expecting for a recovery soon, I think crude oil has more room to fall. The current market is plagued with oversupply and that scenario isn’t expected to change anytime soon.

SO, even though oil is hovering near multi-year lows, I believe it still has more room to fall as production is still high. Lower oil prices will put downward pressure on Chesapeake Energy, which is another reason why I think the stock is a short.

Conclusion

Amid weak commodity environment, all stocks in the energy sector are going through a rough patch. While many stocks will recover in the long-run, the likes of Chesapeake Energy will continue heading lower. After yesterday’s unjustified rally, I think investors should initiate a short position in Chesapeake Energy. Although the stock has depreciated considerably in the last 12 months, I think it has more downside to offer, making it a compelling short.
Published on Jan 6, 2016
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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