Whenever anyone writes about Chesapeake Energy Corporation (NYSE:CHK), one or two topics tend to be the rule: debt and oil/ gas prices. Indeed, Chesapeake’s name has been synonymous with debt for some time as the company struggles to get out from under its heavy burden, and short interest in the name remains high because of it. Meanwhile, it seems oil prices have reversed course as signs of optimism in the energy sector start to fade.
Chesapeake Energy stock surged by about 2% in early trading on Thursday before reversing course, although it remains in the green as of this writing. There seems to be little to no news on the company today, making the climb a bit strange, especially given the reversal in oil prices. The S&P 500 Energy Sector skidded on Wednesday and has continued to be in the red today so far.
In a post on Thursday, Seeking Alpha contributor Daniel Jones highlighted Chesapeake Energy’s debt and explained why he thinks the company should sell off some low-quality assets. He expects the company to announce with its third-quarter earnings report that it raised its debt during the quarter.
He notes that the company just issued $850 million in debt and used some of it to pay down $550 million in debt but adds that this $300 million in fresh debt falls in the fourth quarter because it was issued this month. He believes that the debt that was added during the third quarter was done under the company’s revolving credit facility, under which it has $3.8 billion in capacity available. That capacity was reduced to about $1 billion, he adds, after Chesapeake’s 1.5 billion term loan and $575 million in other loans.
The company is set to release its third-quarter earnings report on or around Nov. 2, and Wall Street is currently estimating earnings of 12 cents per share on $2.07 billion in revenue. In last year’s third quarter, Chesapeake Energy reported earnings of 9 cents per share on $2.276 billion in revenue.
CFRA Investment Strategist Lindsey Bell said in a note today that they’ve become a bit less cautious on Energy as a whole going into the sector’s earnings season, although they remain Marketweight on it after upgrading it from Underweight in May. Halliburton kicks earnings season off for Energy on Monday. The Energy sector was down 9.4% year to date through Wednesday’s close, but things started to shift in August. The sector is up 9.9% since Aug. 18, which marked the bottom.
She notes that Energy has rebounded over the last two months because of rising oil prices. Impacts from Harvey and Irma drove the initial rebound, and then the tensions in the Middle East have helped continue the momentum. CFRA’s reduced caution on Energy is the result of improving fundamentals, normalizing valuations and positive technicals, all of which bode well for Chesapeake Energy, its stock and its third-quarter earnings report. Bell believes that investor sentiment is finally starting to catch up with their Marketweight rating.
Still, WTI Crude for November delivery is down 1.3% today to $51.37, while Brent Crude for December delivery is down 1.6% at $57.22. Oil is staying stubbornly below that magical $60 per barrel price, even as Vitol Chief Ian Taylor warns that the growing optimism could be only false hope. His firm is the top trader of Crude, and he predicts a tumble for Brent back to $45 per barrel — or perhaps even closer to $40.
Still, Bell predicts that the third-quarter earnings season will be good for the Energy sector, so investors will be watching Chesapeake closely to see how it fares versus its peers. Chesapeake Energy stock has been bouncing around all day so far as investors consider what the fluctuating oil prices mean for it; the stock is up 0.93% at $3.81 as of this writing.
Short interest in Chesapeake Energy stood at 21.5% of the float as of Oct. 13, but that’s still a decline from the peak in July when it was at 23% of the float.