You have no doubt read (repeatedly) about the two factors that have combined to hammer the stock market. The coronavirus from China and the oil price war between Russia and Saudi Arabia have resulted in record losses. Painful as it has been for investors, most stocks will eventually recover. Chesapeake Energy (NYSE:CHK) is another story. Already in trouble before all of this went down, CHK stock isn’t just feeling the peripheral shock from reaction to global events. This company is feeling the full impact of the oil price war, which is shaking the American shale drilling industry.
One of the biggest stories of 2020 has been the rapid disintegration of the relationship between Saudi Arabia, OPEC and Russia. The oil producers were talking production cuts in February. When they failed to reach an agreement, the situation quickly escalated into a price war, with both Saudi Arabia and Russia cranking up production. The result is a market that’s being flooded with cheap oil, and the steepest decline in oil prices since the 1991 Gulf War.
The Primary Issues Bearing Down on Chesapeake
The price of Brent Crude fell to $31.50 on Thursday. That’s well below the breakeven price for U.S. shale oil drillers of roughly $40 per barrel. Obviously, this is bad news for Chesapeake Energy. At this point CHK stock is down 82% on the year.
But what about natural gas? There’s no relief for Chesapeake there.
A warm winter, continued oversupply in the American market and falling demand because of the coronavirus have natural gas prices “in a tailspin.”
As if being a casualty of the oil price was wasn’t enough, Chesapeake also faces risk to its business from the coronavirus pandemic. International travel is dropping. Even local travel is down as schools close and companies ask employees to work from home. The International Energy Agency is expecting 2020 to see the first full-year decline in oil consumption in a decade.
Could There Be a Bailout?
Some oil industry executives have reportedly approached Washington for financial assistance. However, the response has been cool. Bailing out oil and gas producers is a tough political sell, and President Trump has repeatedly positioned lower gas prices as being good for consumers. One industry representative told Politico:
“Politicians hate high oil prices. Theirimagining they’re going to get sympathy for this is completely devoid of reality.”
Bottom Line on CHK Stock
The last time I wrote about Chesapeake Energy, I noted what a risky bet it was. A world turning against hydrocarbons had reduced CHK to a penny stock. That greening is a trend that’s unlikely to ever reverse and shale drilling is especially reviled by environmentalists. Making matters worse, the company was facing a series of lawsuits over accidents at several of its facilities. That was on Feb. 12, and CHK stock was trading at 50 cents.
In only a month, the company’s situation has gone from bad to worse. The price for International Brent Crude has now plunged to $31.50, from the $56.34 it was at on Feb. 12. Chesapeake is trading at 20 cents, after dropping as low as 13 cents on Thursday.
In an interview for The Wall Street Journal, the CEO of Pioneer Natural Resources (NYSE:PXD) was blunt about the effects of the current oil price war on his industry: “Probably 50% of the public E&Ps will go bankrupt over the next two years.”
Deeply in dept, with the long-term prospects for oil and gas looking shaky, facing lawsuits, having to deal with the prospect of the coronavirus lowering demand for at least the short term, and reeling from a price war between two petro economy giants?
Chesapeake Energy is in trouble.
Brad Moon has been writing for InvestorPlace.com since 2012. He also writes about stocks for Kiplinger and has been a senior contributor focusing on consumer technology for Forbes since 2015. As of this writing, he did not hold a position in any of the aforementioned securities.