Chesapeake Energy Corporation (CHK): Buy….or Beware?

At last count, Chesapeake Energy Corporation (NYSE:CHK) had $12.6 billion in both senior debt and term loans outstanding, with an average maturity of less than five and a half years. That’s not so bad when you consider that the company should produce more than $5 billion in operating cash flow this year if gas stays above $4. However, it’s taking that money plus another billion and plowing it back into its drilling program. In order to make ends meet the company has turned to asset sales.

It’s already sold a slice of its Mississippian acreage to a Chinese company and is planning to sell its stake in the champion of natural gas as a transportation fuel, Clean Energy Fuels Corp (NASDAQ:CLNE). The problem with these asset sales is that everyone knows that Chesapeake needs the money, so it’s not going to get full value for the assets. The bottom line is that you simply cannot run a company on asset sales alone, especially when a heavy debt load is behind those forced sales. Until Chesapeake Energy can live within its cash flows, the company’s stock will likely be weighed down.

The bottom line
Chesapeake Energy is one of those companies that comes with both great risk and the potential for great reward. If you’re the type of investor that likes that type of scenario, then buying Chesapeake Energy Corporation (NYSE:CHK)’s stock might be right up your alley. However, if risk isn’t something that allows you to sleep at night, you’re better off just watching this one from the sidelines.

The article Chesapeake Energy Stock: Buy or Beware? originally appeared on Fool.com is written by Matt DiLallo.

Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Clean Energy Fuels. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy.

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