Chesapeake Energy stock
Since the beginning of 2017, Chesapeake’s stock has fallen ~32%, while crude oil prices have declined ~16% during the same period. Natural gas prices have dropped 11% since the beginning of 2017.
The energy sector
Chesapeake Energy has underperformed the energy sector as well as crude oil and natural gas prices. The Energy Select Sector SPDR ETF (XLE) has fallen 14.5% during the same period.
The energy sector and energy prices have both underperformed the broader market, or the SPDR S&P 500 ETF (SPY). The graph above notes that the SPY has risen ~10% since the start of 2017.
What strategy are investors likely to follow?
Amid a backdrop of weak energy prices, energy investors are likely to lean toward low-cost producers. Chesapeake’s production expense guidance range for 2017 is $2.50–2.70 per boe (barrels of oil equivalent). In 2016, the company’s production expense was $3.05 per boe. According to its presentation, this was the lowest among peers Anadarko Petroleum (APC), Apache (APA), Hess (HES), and Noble Energy (NBL).
The lower production expense forecast in 2017 and the fact that its production expenses are lower than some well-known players are likely to make investors less jittery to invest in the stock. CHK’s hedge position could also make investors confident about the stock. Notably, 75% of CHK’s 2017 natural gas volumes are hedged, and 64% of its oil volumes are hedged for 2017.
However, some conservative investors are wary about the company’s debt levels. Its debt at the end of 1Q17 amounted to $9 billion. CHK plans to increase its spending this year over 2016, so it will require sufficient cash flows.
But investors may not be in favor of the company taking on more debt to fund more spending. For this reason, debt reduction has been a key focus area for CHK in 2017.