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Gamble or Scramble: How Would You Play Chesapeake Energy?

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Gamble or Scramble: How Would You Play Chesapeake Energy? PART 1 OF 14

Chesapeake Stock Had Rough First Half: Can It Turn Around?

CHK stock performance

Chesapeake Energy (CHK) stock continues to remain under pressure this year. Despite better-than-expected earnings in 2Q17, it seems like the markets needed more convincing to warrant a positive stock reaction.

Chesapeake Stock Had Rough First Half: Can It Turn Around?

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Additionally, crude oil prices may need to rise on a sustainable basis in order for CHK stock to improve, since CHK is focusing on oil-focused growth this year.

What could put Chesapeake in an even more precarious situation is its debt level. Although the company has been actively focusing on lowering its debt, its debt remains high. Its debt as of June 30, 2017, was $9.8 billion. For context, CHK’s market cap is $3.5 billion.

In the graph above, we can see that CHK stock has performed poorly compared to the Energy Select Sector SPDR ETF (XLE), the broader energy sector, which has fallen 18.0% since the beginning of this year. CHK stock has fallen ~44.0% in the same period. In comparison, the broader market, the SPDR S&P 500 ETF (SPY), has risen ~9.0% since the start of this year. The energy sector makes up ~6.0% of SPY.

Crude oil prices have fallen ~8.0% since the beginning of this year, while natural gas prices have fallen 12.0% in the same period.

CHK’s key objectives for 2017

CHK’s key priorities for this year include debt reduction at the forefront, followed by capital efficiency, improved EBITDA (earnings before interest, tax, depreciation, and amortization) margins, and operational performance.

In its 2Q17 earnings conference, CHK noted, “In the first six months of 2017, we’ve made good progress at increasing our EBITDA through growing oil production, keeping our cash costs low and reducing our market commitments and obligations by approximately $585 million.”

Looking at 2018, the company believes its operating and capital efficiencies provide it with flexibility in capital spending. It also believes that cash flow neutrality is achievable at $50 oil prices and $3 natural gas prices in 2018.

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