Warning: Don’t Be Tempted to Invest in This Cheap Stock

It has been a rough ride down for Chesapeake Energy (CHK).

While natural gas prices have fallen nearly 60% since June 2014, shares of the country’s second-biggest natural gas producer are down more than 90%.

Today, speculators may see Chesapeake and think it’s a solid value. But is it worth buying at these historically low levels? In short, no. Here’s why…

[ad#Google Adsense 336×280-IA]Simply put, Chesapeake owes its creditors too much money.

And despite its low share price, there’s more risk than reward in investing today.

Having a lot of debt isn’t new for Chesapeake.

Since 2007, the company has held more than $10 billion in debt on its books.

But it wasn’t until 2011 that Chesapeake consistently had more than $10 billion in annual revenue.

Meanwhile, Chesapeake has been spending huge amounts of money for years. From 2001 to 2014, the company’s capital expenditures outweighed its cash from operations (or free cash flow). Like any other business, if it spends a lot of money buying assets, it has to generate enough positive cash flow to run its business and to service its debt.

Plus, Chesapeake’s big capital expenditures came at a time when natural gas prices were high. Back in mid-2008, natural gas traded for more than $13 per Mcf (thousand cubic feet). Companies like Chesapeake figured out how to produce huge amounts of natural gas. Regular Growth Stock Wire readers know what happened next…

Since 2005, natural gas production is up 70%. When production increases that fast, demand needs to keep up… or prices will drop. Sure enough, natural gas prices have fallen to less than $2 per Mcf today.

Having spent so much money on mergers and acquisitions over the years, Chesapeake had to sell some of its assets to keep its head above water. From 2012 to 2014, Chesapeake sold billions of dollars’ worth of gas-focused assets and bought oil-focused ones.

But oil prices peaked in June 2014 and have yet to recover.

Given Chesapeake’s missteps, it’s not particularly surprising that management is currently working with bankruptcy attorneys. Earlier this month, the company told investors that it “currently has no plans to pursue bankruptcy and is aggressively seeking to maximize value for all shareholders.”

That news didn’t reassure investors. Shares dropped more than 50% in February alone. They have since rebounded slightly on rumors of an acquisition – and it wasn’t the first time there has been speculation of a buyout. That would be the best-case scenario for shareholders. But gas prices remain low, and no buyout offer has been reported.

Rather than gamble on Chesapeake shares, focus on oil and gas companies with lower (or no) debt… and look to purchase after energy prices start to head higher

Good investing,

Brian Weepie


Source: Growth Stock Wire