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Chesapeake’s Troubles Make It a Stock to Stay Away From

April 23, 2014 | About:



Chesapeake Energy (CHK), America’s second-largest natural gas producer, has struggled with its numbers as the natural gas market had had a tough time of late. Chesapeake incurred a net loss of $159 million in the last reported quarter. It was, however, able to increase its revenue by 28% to $4.54 billion.

Tough Times

Nevertheless, the dynamics of the natural gas industry do not look very impressive. Therefore, this will affect the company’s performance in the long run and lead to disappointment. Moreover, Chesapeake’s daily production declined 3% in the last quarter as a result of reduction in well connections. Chesapeake has also terminated drilling rig contracts recently as it incurred heavy expenses due to severe weather conditions and other macroeconomic headwinds such as growing demand of shale gas that is affecting natural gas pricing, eventually leading to further loss of its market share.

Chesapeake is concentrating on various aspects of its business to get rid of these tough situations and has definite and concrete strategies to raise its cash through sale of assets that will assist the company to decrease its expenditure and boost its income. In addition, Chesapeake is planning to spin off the oil field service division and raise about $4.4 billion. Chesapeake is also focusing on discovering and developing natural gas and oil assets onshore in the U.S. through these spin-off strategies. This could perhaps turn the company to profitability in the long run.

Selling Assets

In addition, Chesapeake has also declared the sale of up to 437 natural gas units and related assets as natural gas pricing remains unfavorable due to rising demand of shale gas. The evolution of horizontal drilling and hydraulic fracturing over the past few years has allowed companies to tap shale gas at cheaper rates. This, on the contrary, has led to increased production of natural gas in the U.S., well above the growth in consumption that has affected its price ultimately.

However, Chesapeake has recently noticed significant increase in prices of natural gas abroad due to accelerated export demand. Hence, the company expects much better financial and operational performance in the current fiscal 2014. Further, exports are expected to play a key role in lifting natural gas prices in the U.S. despite surging supply from shale gas resources.

In addition to this, electricity demand is also expected to grow in the future, a positive sign for the company that will certainly help natural gas price to shoot up, because of the fact that natural gas has much lower carbon intensity compared to coal. This provides the company an attractive alternative fuel for new power generation plants because of relatively low capital costs and favorable heat rates. But, analysts expect the momentum in reduction of natural gas prices will continue in the future as well. Even Chesapeake feels the same pressure on the natural gas pricing that is supposed to decline in the future, therefore Chesapeake is focusing on asset sales to maintain profitability, or else it would be in dire straits.

But the company can take heart from the fact that natural gas is expected to remain the fastest growing global energy source until 2013, growing at a rate of 1.9%, regardless of current pricing. However, the shore-term prediction does not look promising as natural gas prices have declined in the past six to seven years.


Overall, the present scenario for Chesapeake is very complex. As a result, investors would be better off if they don’t invest in the stock.

Rating: 2.6/5 (5 votes)



Vgm - 4 months ago

Your view contrasts with that of Longleaf, as discussed in their latest Quarterly Report from last week. But I'd agree the current price level is not an attractive entry point:

"Energy company Chesapeake retreated 5% in the quarter following a strong 2013. Short-term questions about production levels, the mix between gas and liquids, and additional asset sales pressured the stock. Our appraisal, however, grew slightly due to successful cost reductions. CEO Doug Lawler has made substantial progress since taking the helm last year, and we believe his capital discipline and operational effectiveness will reward shareholders."

(I am long CHK and optimistic for its 3-5 year future)

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