Chesapeake Energy: Is a Santa Claus Rally in the Cards?


Dec. 3 2019, Updated 3:08 p.m. ET

In November, Chesapeake Energy (CHK) lost 55.6%. The concern over the company’s outlook is behind the sharp decline. However, a rebound in its share price could be possible with the rise in oil prices. If OPEC+ announces a deeper cut on Friday, energy stocks could move higher.

Through OPEC+, Saudi Arabia wants to increase the magnitude of the production cut. Higher oil prices would drive the valuation of Saudi Arabia’s Aramco. To learn more, please read Oil Prices: A Look at China and OPEC’s Impact.

Today, the Refinitiv weather forecast models indicated a rise in HDDs (heating degree days) compared to yesterday’s reading. This trend might be a positive development for CHK.

At least for this week, oil and natural gas prices might trend higher based on these sentiments, and CHK might rise with oil prices. However, for a sustained rise, the company’s outlook would play an important role.

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CHK’s strategy

Earlier this year, CHK’s management increased its production mix in oil. However, weaker oil prices have impacted CHK’s financials. If oil prices rise in 2020, we might see a revival in CHK’s earnings. In Q2 2019 and Q3 2019, CHK’s adjusted earnings per share were in negative territory.

Free cash flow could be a problem

Chesapeake Energy has not reported positive free cash flow since Q2 2018. In 2019 so far, its cumulative free cash flow was -$516 million.

Among natural gas–weighted stocks, CHK’s net-debt-to-EBITDA ratio was 3.1x. Cabot Oil and Gas (COG) has a much smaller net-debt-to-EBITDA ratio of 0.6x.

A higher ratio suggests that Chesapeake Energy stock is more leveraged than its peers. Usually, negative cash flow increases company debt obligations if the company decides to finance that cash requirement with debt.

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Chesapeake Energy’s recent analyst views

Last Tuesday, Scotiabank upgraded its rating on CHK from “sector perform” to “sector outperform.” Meanwhile, it reduced the target price by $1 to $2. On Wednesday, UBS also reduced the target price from $1 to $0.50. Last month, Moody’s downgraded CHK’s rating. To learn more, please read A Way Forward for Chesapeake after Last Week’s Slide?

Of the 22 analysts tracking CHK, only 5% recommended a “buy.” Around 41% of the analysts either have a “sell” or a “strong sell” recommendation on the stock. The remaining analysts recommended a “hold,” according to Reuters data. For the next 12 months, analysts’ mean target price suggests a potential upside of 124.5% in CHK.

Moving averages, price targets, and short interest

On Monday, CHK closed 23.7%, 47.2%, 56.1%, and 69.5%, respectively, below its 20-, 50-, 100-, and 200-DMA (day moving average). Also, its 50-DMA was 42.2% below the 200-DMA. At $0.80, its 20-DMA is the immediate resistance zone for Chesapeake Energy. Technically, for a short-term pullback, CHK must decisively move above the 20-DMA level.

On Friday, CHK’s implied volatility was 146.7%, 15.1% below the 15-day average. Last month, its implied volatility spiked to 204.8%, the highest in the last four years. In November, CHK fell to its lowest level since 1994.

Until Friday, CHK could close between $0.51 and $0.71. This price range was derived from CHK’s implied volatility. The confidence interval is 68%, and the model assumed a normal distribution of prices.

Last month, Chesapeake Energy’s short-interest-to-equity float ratio declined by 36.5% to 11.5%. Before its Q3 2019 earnings release, its short interest rose unexpectedly. The decline in CHK started after its earnings disappointment. To learn more about CHK’s earnings results, please read Chesapeake Energy Fell after Its Q3 Earnings Results.


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