uploads/2019/10/AdobeStock_279243123.jpeg

Bridgewater Exited Chesapeake: Should You?

By

Updated

In the third quarter of fiscal 2017, Bridgewater Associates sold all its stake in Chesapeake Energy (CHK). It had accumulated this stock since the third quarter of fiscal 2016. In this period, the stock fell by 31.4%.

After Ray Dalio’s Bridgewater Associates exit, the stock prices have declined 68.4% to date. It was the right decision at the correct time. Moreover, this year so far, the stock has lost around 35.2%. It underperformed Energy Select Sector SPDR ETF (XLE). XLE has risen 0.1% in this period.

Article continues below advertisement

Lower natural gas

After such a large fall in stock prices, CHK is not out of the woods yet. Prolonged weakness in natural gas prices is behind the fall in the stock prices. Since 2008, natural gas prices have declined by 70%. In 2008, CHK operated with a production mix of over 90% in natural gas.

With the US shale revolution in 2008, natural gas supplies rose tremendously and dragged prices. Read Oil Rigs Impact Natural Gas and Energy Stocks to understand the impact of oil production on natural gas supplies.

CHK: oil’s bearish outlook

Once a prominent player in natural gas, CHK’s management has shifted its focus to oil. Last year, management decided to increase the production mix in oil. The decision aimed to increase the company’s profitability amid weaker natural gas prices. Also, it included new upstream assets in the portfolio to improve profitability. Read Chesapeake Energy: Key Drivers Before Q2 Earnings to know more about CHK’s upstream assets.

However, in the last few years, bearishness in oil prices has also risen. The OPEC has almost lost control over oil pricing. Moreover, growing competition world-wide and slowing demand growth has killed any upside in oil prices.

In addition, the oil market is also well supplied. Even after such a large supply disruption, WTI crude oil active futures failed to hold the $60 level. In the past few months, analysts reduced the price target on CHK.

Chesapeake’s earnings

Chesapeake Energy might report its earnings by the end of this month. In 2018, it reported the third-quarter earnings on October 30. In the third quarter of fiscal 2019, its adjusted negative EPS (earnings per share) is expected to contract by $0.2 on a sequential basis, based on analysts’ consensus estimates. A year ago, CHK’s EPS stood at $0.19.

Between the third quarter of fiscal 2018 and 2019, on average, WTI crude oil active futures declined 18.7%. Henry Hub natural gas prices fell 23.4%. Therefore, such a large fall in energy commodities prices is behind the expected negative earnings.

Advertisement

More From Market Realist