Is Chesapeake Energy Destined to Fall More?



On November 6, Chesapeake Energy (CHK) stock fell 29.2% and closed at $0.90, below $1 for the first time since 1999. A year ago, it was trading near $3.50. The decline reflects the energy sector’s downturn. This year, the Energy Select Sector SPDR ETF had risen just 4.7% as of Wednesday, while the S&P 500 (SPY) had risen 22.7%.

On November 5, Chesapeake Energy announced its third-quarter earnings results, reporting negative earnings for a second consecutive quarter. That day, its stock fell more than 15%. Concerns are rising about CHK’s sustainability amid lower commodity prices.

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No relief for oil and natural gas

As of Wednesday, US crude oil prices had risen 24.1% this year, while natural gas prices had fallen 3.8%. The decline in natural gas prices is hurting CHK’s profitability. Read Chesapeake Energy Fell after Its Q3 Earnings Results to learn more. Moreover, this winter could be warmer, like that of 2015–2016.

However, this year, CHK has increased crude oil’s share of its production mix. The company estimates oil’s share will expand YoY (year-over-year) to 26% this quarter from 19%. It forecasts that share expanding by two percentage points sequentially.

However, oil’s outlook suggests more woes for CHK stock. OPEC forecasts that by 2024, US shale oil producers and OPEC might compete for global market share. As a result, rising US oil exports could impact global crude oil supplies. In January 2008, US imports of crude oil and petroleum products from OPEC countries were at 198.86 million barrels, the highest level since 1993. However, in August 2019, this figure fell to 51.46 million barrels, indicating how domestic producers have impacted OPEC’s market share in the US. A rise in non-OPEC oil supplies could impact OPEC oil producers’ global market share.

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The IEA (International Energy Agency) foresees an oversupply situation in next year’s first two quarters, and expects US crude oil supplies to rise 0.9 MMbpd (million barrels per day) YoY in 2020. Therefore, we believe “OPEC plus” (OPEC members, Russia, and a few non-OPEC oil producers) needs to reduce production by at least another 1 MMbpd next year to avoid an oil price crash.

Chesapeake’s oil pricing

A possible market share war between OPEC and non-OPEC suppliers in the next five years could devastate CHK’s financials. The company’s oil assets might not sustain any further decline in crude oil prices.

ConocoPhillips (COP) has an advantage over CHK on oil pricing. COP’s upstream assets outside the US offer it higher average selling prices than domestic WTI. Usually, WTI crude oil prices are lower than Brent crude oil prices. Because of this spread between WTI and Brent, CHK’s average realized prices are lower than COP’s.

In fact, according to COP’s earnings results last quarter, every dollar of difference in Brent crude oil prices would impact its net income by $150 million–$170 million. A dollar difference in WTI crude oil prices would have a $30 million–$40 million impact on its earnings. CHK’s earnings are even more sensitive WTI price differences.


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