After plunging 43.6% in 2017, investors in Chesapeake Energy (CHKA.Q) were hoping for a bounce-back year in 2018. Unfortunately, that hasn't happened, as shares of the oil and gas giant have lost about 10% of their value through mid-November. That decline, however, doesn't even begin to tell the story of what has been an up-and-down year for the company.
Stumbling out of the gate
After hugging the flat line for the first several weeks of the year, Chesapeake Energy tumbled in February because it issued a disappointing production forecast. While the company noted that its output in the fourth quarter of 2017 was strong, it anticipated that 2018's volumes would come in roughly flat with the prior-year's level. That didn't sit well with analysts and investors, who were hoping for more growth from the oil and gas giant.
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The company's stock bounced back a bit toward the end of the month after it reported fourth-quarter results. Not only did Chesapeake post a better-than-expected profit, but the company tweaked its 2018 forecast, which would see it increase production 3% for the year, driven by a 5% rise in oil output.
An earnings-fueled rebound
Shares of Chesapeake got another post-earnings boost in May after reporting stronger-than-expected first-quarter results, which was its "best quarterly financial performance in over three years," according to CEO Doug Lawler. Fueling the quarter was higher oil and gas prices, as well as the company's ability to hold down expenses.
The company also noted that it was delivering strong drilling results in the Turner formation of Wyoming's Powder River Basin (PBR), which led it to add another drilling rig to the region. That additional rig would help boost Chesapeake's oil production and margins in the coming quarters.
The combination of higher oil prices, stronger-than-expected earnings, and optimism on the PRB enabled Chesapeake Energy to more than erase its early year slump. By July, the company's stock had pushed its year-to-date rally to more than 30%.
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The rally ran out of gas
However, Chesapeake Energy's rally slowly ran out of fuel as the months wore on. One of the issues was the company's decision to sell its assets in the Utica Shale. While shares initially popped on the news, the stock quickly gave up those gains as investors digested the deal. One factor weighing on the stock was that even though the company sold the asset for $2 billion, it would barely put a dent in the company's leverage ratio because it didn't fetch as high a value as investors had hoped for.
Meanwhile, Chesapeake's sell-off intensified in October when the company unveiled that it was buying WildHorse Resource Development (NYSE: WRD) for $4 billion in cash and stock. Chesapeake made the move to accelerate its strategic plan since the deal would boost its oil production while reducing its leverage ratio. However, the company paid a high price for WildHorse Resource Development because it will issue a significant number of new shares in the deal that will dilute existing investors. While the company believes the deal will pay off over the long run, it was a risky move that could backfire if oil prices tumble.
That certainly has been the case in recent weeks as crude prices have fallen off a cliff on renewed worries about supply and demand. After surging into the $70s earlier in the year, crude has fallen all the way back into the mid-$50s, which has added even more weight to Chesapeake Energy's stock.
Still lots of work to do
Chesapeake Energy's financial results have noticeably improved this year. However, the company still is working to strengthen its balance sheet and reposition its portfolio. While it made some bold moves to accelerate both this year by selling its Utica Shale position and buying WildHorse Resource Development to be an oil growth engine, the company hasn't yet reached its target levels. Because of that, the Chesapeake Energy's stock likely will remain quite volatile until the company finally is back on solid ground, which could still be a few years away.
