The Energy Company Could Get Worse Before Getting Better

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Chesapeake Energy (NYSE: CHK) has seen a remarkable fall from grace. In the first eight years of the new millennium, the company’s stock rose from just $2 a share to over $65, before trading in a free fall the last four years on balance sheet concerns. The company continues to pay a good dividend, but its balance sheet and operating metrics should be scary to any investor who is considering an investment in this space.

For the most part, it has been speculation, and Chesapeake’s unwillingness to promptly respond to concerns regarding its debt load that has led its shares lower. Last week the energy company lost nearly 8% of its value, which carried over from the previous Friday, as the firm announced the delayed of certain assets being sold until 2013.

The company’s goal is to sell assets to keep its debt in check. But by delaying the sale of important assets, which need to be sold, the company continues to keep an extraordinary amount of debt on its balance sheet, nearly $16 billion.

So far the company has not proven that its operations can remain stable enough to produce the required amount of proceeds to reach its goal of obtaining a 3x debt-to-EBITDA ratio. The company needs $2.5-$3 billion in proceeds, but in a 10-Q filed Friday the company basically revised its own guidance. The company said the following in its 10-Q:

“We project that our capital expenditures will continue to exceed our operating cash flow through 2013.”

“We may not reach our previously announced goal of $9.5 billion by year-end 2012 until 2013.”

Both quotes are nothing new from the company. The company continues to struggle with capital expenditures and has failed to meet its goals. Now, we have yet another extension, because if the company says “may not” I take that for “will not” due to recent history.

It has been a great decline for this company, and investor confidence remains uneasy to say the least. Every time the company looks to be making progress, they take a step backwards, and it continues to crush investor confidence.

Looking ahead, there seems to be too many questions with this company. I prefer a company such as EOG Resources (NYSE: EOG), a company with just $6.3 billion in debt, and is growing aggressively. The company posted a great quarter and was trading at multi-year highs before last week’s strong selling in the market.

EOG Resources has already said that it plans to spend much less on “money-losing” drilling in 2013, and that it should see significant bottom line growth to match its 45% rise in production year-over-year. A company such as this is much safer than a company such as Chesapeake, a company with an uncertain future and a management staff that seems unable to predict future spending. There is a lot of value in the energy sector, but in regards to Chesapeake, it could get worse before getting better. 


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