After peaking at $5.40, Chesapeake Energy (NYSE: CHK) ended at $4.55 last week. The drop in oil prices could signal an end to this natural gas producer’s rally.
On July 11, oil prices fell by a sharp 5%. The weakness in the energy sector will further shake out weak holders in CHK stock. Since the stock is already up around 80% from yearly lows, a correction should be expected.
But at a P/E in the single digits and EPS growth at over 110% this year, investors need to decide if the downtrend will last.
Chesapeake Energy’s upcoming quarterly report, scheduled for August 2, should follow-up with the strong Q1 report. In the last quarter, OCF (operating cash flow) rose from -$14 million to $552 million. EBITDA rose from $45 million to $703 million.
Even if the earnings report continues with last quarter’s strength, markets tend to discount a stock if prospects are expected to worsen.
The oil rally may lose steam, encouraging investors to shift out of CHK stock and into something more stable. This could include Exxon (NYSE: XOM) or Chevron Corporation (NYSE: CVX).
Takeaway
Chesapeake hedged a good amount of its production, so any downside may limit the damage to results. Conversely, if oil prices resume their move up, the company will have a hard time beating estimates.
