If you think Chesapeake Energy (NYSE:CHK) stock is all about the price of natural gas and oil, think again. It’s all about a mountain of debt. It’s also high-time bullish investors say “goodbye” not “good buy” to CHK stock. Let me explain.
Kick ’em when they’re down? It sure seems like it when it comes to CHK stock. But that’s not really the problem. To be clear, the once-mighty energy giant has taken a substantial hit — in excess of 20% — over the past several sessions. It’s a punishing decline to be sure. Yet Chesapeake isn’t alone in its latest miserable chapter as a publicly traded company.
As the coronavirus has grown into a global outbreak, the prices of oil and natural gas have traded sharply lower on fears of possible much weaker worldwide demand. For its part the United States Oil Fund, LP (NYSEARCA:USO) is off approximately 10% since the epidemic has taken over the headlines. Natural gas which was already under in the grips of a massive bear market due to cheap oversupply and warmer seasonal temperatures has tumbled as well.
And industry heavyweights Chevron (NYSE:CVX), Total (NYSE:TOT) and Exxon Mobil (NYSE:XOM) have responded to the outbreak with declines of around 5% to 7% over the period. Clearly, Chesapeake stock hasn’t been alone in its misery.
But CHK stock does stand out in another way not tied to this past week’s out-sized loss. Chesapeake Energy trades for under $1.00 a share. Specifically, with its latest plunge shares have lost a less-threatening 13 cents to 14 cents and changed hands for about 52 cents. It’s obviously ugly, but that’s not the worst of it either.
To call Chesapeake stock a penny stock would be a mistake. With shares still sporting a market capitalization of $1.01 billion the company’s current value is squarely in the middle of other small cap stocks worth $300 million to $2.0 billion. But rather than believe that’s a positive feature for today’s shares, investors are being warned to avoid CHK and its massive obligations totaling more than $9.0 billion.
In no uncertain terms, management has done an admirable job of keeping the company out of bankruptcy proceedings near-term. And its latest restructuring deal did avoid another forced asset sale. But at the end of the day, recent “going concern” warnings aren’t likely to go away. Moreover, investors are being warned to say goodbye to CHK stock rather than consider shares a good buy.
CHK Stock Price Monthly Chart
It’s enticing to place a bet on an obvious underdog like CHK stock making a turnaround. And on some levels, today’s cheap dollar wager sure seems like a decent bet. There is a monthly price chart which shows Chesapeake stock is now in a testing position of historic lows dating back to 1994. The price action also sports an oversold, bullish stochastics crossover set-up. Despite all that, I’d stress Chesapeake’s chances of a sustainable bottom are bleak given the company’s very challenging situation.
Source: Charts by TradingView
Bottom-line, the more-likely outcome for CHK is a reverse split to artificially jack up the share price and allow stock to maintain listing requirements. Unfortunately that’s all smoke and mirrors and the artificial manipulation of share price is likely to be followed by bearish investors continuing to squeeze every last bit of market value out of shares over time. Still and with caveats in place, if investors are still intent to pony up and play a very long-odds bet, the Jan 2022 $0.50 / $1.50 for 17 cents coupled with appropriate sizing is as good as it gets in our view.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.