Chesapeake Energy (NYSE:CHK) is a “hot mess” ‘of a company that has been circling the drain for years and has no real hope of a brighter tomorrow. CHK stock began to implode in November when the Oklahoma-based company warned investors about its ability to continue as a “going concern” if depressed oil and natural prices persist combined, which energy analysts are forecasting. Furthermore, CHK’s creditors are planning on tightening terms of their loans, which will squeeze the company’s already shaky balance sheet even further.
Chief executive Doug Lawler has tried to reassure investors that the company’s 30% reduction in capital expenditures, reduction in debt, and asset sales would keep the company’s creditors at bay. He’s even bought CHK stock in the open market and now has more than 5 million shares.
Unfortunately, Wall Street didn’t like what Lawler was selling
Investors have dumped CHK stock in droves. It plunged nearly 60% in 2019 and tumbled another 32% this month. The shares closed Friday just shy of 52 cents, roughly 81% below the average $1 price target of Wall Street analysts. Forecasts range from $2 on the high side to $0 on the low side.
Skeptical Credit Agencies
Credit rating agencies including Moody’s aren’t impressed with CHK either. Its credit ratings are in tatters. Moody’s senior analyst John Thieroff announced a downgrade in November of the company’s “speculative” debt rating to
B2 from B1, which will increase its borrowing costs. There also is a potential for further downgrades because of “the risk of additional debt repurchases at significant discounts, which could result in our determination a distressed exchange had occurred,” he said.
Keep in mind that Lawler replaced Chesapeake’s late colorful and controversial founder Aubrey McClendon as CEO in 2013, who was ousted by Carl Icahn and other activist investors. He was facing federal charges at the time of his death in an automobile crash. McClendon spent billions on shale properties during the boom in fracking which has saddled the company with billions in debt. As of Sept. 30, 2019, CHK’s total liabilities stood at $9.5 billion, which for a company with a market cap of $1.1 billion is huge.
Terrible Timing for CHK Stock
In recent years, Lawler has pivoted CHK to crude oil where the margins were better than gas. The company has stepped up exploration in Wyoming in recent years and in 2019 acquired Wildhorse Resource Development for $4 billion. When the companies announced the deal in 2018, WTI (West Texas Intermediate) crude averaged $65.06. Prices fell to $57.02 in 2019 and are expected to rebound to $59.25 this year and $62.03 next, according to the short-term outlook from the U.S. Energy Information Administration (EIA).
Indeed, many oil and gas companies are struggling. Chevron (NYSE: CVX) recently announced a write-down of between $10 billion and $11 billion of its gas assets. Since the start of the year, BP (NYSE:BP), Repsol and Equinor wrote down $11 billion from the value of their North American shale assets. Haliburton (NYSE:HAL) took $2.2 billion in charges. Other oil companies, including Exxon Mobil (NYSE:XOM), are coming under increasing pressure from Wall Street analysts to do the same thing.
Though it may be tempting to snap up CHK stock because the shares are “undervalued,” the possible risks far out way the rewards. Remember, sometimes stocks are cheap for a reason.
Jonathan Berr doesn’t own shares of the aforementioned stocks.
