Why the Math Doesn’t Work for Chesapeake Energy

CHK stock comes down to way too much supply and very little demand

If you want to get a clear idea of what is awaiting Chesapeake Energy (NYSE:CHK), you only need to look at Hertz Global (NYSE:HTZ). In their heyday, both companies represented a leading brand in their industries – natural gas for Chesapeake and car rental services for Hertz. But with the latter’s bankruptcy, you’ve got to imagine that the clock is ticking for CHK stock.

Indeed, the similarities are eerie. With changing technologies and shifting industry winds, both organizations found themselves struggling for relevancy. According to the Wall Street Journal, years before the novel coronavirus took down Hertz, the rental specialist replaced its aging fleet with out-of-favor sedans rather than the popular SUV.

Admittedly, the decision was forced on them, as Hertz didn’t have the resources to give the customers exactly what they wanted. However, this move only exacerbated the company’s problem. Switch the backdrop and you have an almost identical situation with CHK stock.

As Reuters noted when rumors started circulating that Chesapeake was on the verge of bankruptcy, CHK was once one of the great natural gas providers. But a supply glut in the commodity killed prices. As part of its recovery effort, management pivoted toward oil production. However, the oil price war between Saudi Arabia and Russia – which was another consequence of the pandemic – came at exactly the wrong moment for the beleaguered company.

True, oil prices have bounced higher from this year’s lows, bolstering big oil firms like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX). But CHK stock has mostly looked “less bad,” which for me tells us everything we could want to know.

Chesapeake Energy is a deeply troubled organization that will only face more pain ahead.

It’s Impossible for CHK Stock to Survive Musical Chairs Game

Part of my bearishness toward Chesapeake is the ugly financials. My InvestorPlace colleagues and I have extensively covered the details. Long story short, their situation is no longer sustainable.

But the other reason why I’m avoiding CHK stock like the plague is that the underlying industry cannot exist at its present capacity. Look around and you quickly arrive at an uncomfortable truth: the energy market has too many players and not enough demand to go around.

Obviously, I’m not surprising anyone when I say this. If you live in a large metropolitan area, you’ll notice that you can get to your destination with little to no traffic, irrespective of the time of day. That’s not normal.

However, the details are difficult to digest. Most alarmingly, the Transportation Security Administration reported that just under 349,000 people passed through security checkpoints on the Friday before Memorial Day weekend. While that’s a substantial bump up compared to the depths of the crisis, it’s also a staggering 88% drop in volume from the year-ago level.

Honestly, you couldn’t come up with an uglier comparison, especially for the unofficial start to the summer season. As I alluded to earlier, the energy industry is playing a game of musical chairs. But unlike the childhood game we all remember, in this case, very few seats are available.

If that wasn’t bad enough, it’s only going to get worse for investments like CHK stock. Some flight destinations have been slashed 90% from their usual volume, meaning that oil demand hasn’t recovered. Instead, what we’re seeing is a dead-cat bounce.

To survive the onslaught, oil companies need time. But this is exactly what Chesapeake lacks.

Consumer Demand May Fall Off a Cliff

If you haven’t written off CHK stock already, perhaps this little tidbit might convince you. Usually, AAA provides a Memorial Day travel forecast for analysts and economists to dissect. This is about as close to a real-time economic barometer as you can get.

But for the first time in 20 years, AAA did not issue their travel forecast. Naturally, Covid-19 undermined the company’s ability to estimate accurately. Based on their data, the worst Memorial Day was in 2009, with 31 million travelers.

That makes you wonder … was the data so ugly that it would have been better off not publishing it?

Obviously, this is speculation. But the damage to consumer confidence is not, which has basically fallen off a cliff. And when support mechanisms, such as mortgage forbearance and the federal relief fund for the unemployed go dry, whoever didn’t go off the cliff the first time will find themselves careening toward the earth.

At that point, it would heap more problems on an already embattled organization. Thus, for your own safety, please avoid CHK stock.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.