Yes, March 16 was a brutal day for stocks. It was the worst one-day performance for the S&P 500 index since 1987, but in a testament to just how bad things are for natural gas producer Chesapeake Energy (NYSE:CHK), CHK stock fell nearly 33% on heavy volume on what may qualify as the company’s last-ditch effort to save itself from extinction.
Widely regarded as one of the pioneers of shale energy production, Oklahoma-based Chesapeake is reportedly working with restructuring advisers, a move that’s probably coming several years too late.
Citing four unidentified sources familiar with the matter, Reuters reported that Chesapeake is working with lawyers at Kirkland & Ellis and investment bankers at Rothschild & Co. and “is studying its options and no debt restructuring move is imminent.”
Market participants were hardly moved by the revelation as CHK closed at 20 cents a share. As for debt restructuring, that would be a positive in many cases except for the part where Chesapeake has $9 billion worth of liabilities against a market capitalization of just over $387 million.
Even if that market value is rounded up to $400 million to give CHK an enterprise value of $9.4 billion, no one is coming along to acquire this company at anywhere close to that price. Not when oil prices are sliding and not when there’s too much natural gas and not enough demand in the market.
Survival Rate is Low
Knowing that CHK has shed 94.35% of its value from its 52-week high is ominous in its own right. Knowing that what was a $30 stock about six years and is less that 20 cents this morning’s opening is a different matter altogether. In other words, it’s difficult, but not yet impossible, to find positives about CHK. The problem is the cons outweigh the pros.
For example, the company has been slashing debt and has $1.4 billion with which to pay imminent bond maturities. Thing is, $1.4 billion is still a far cry from the $9 billion in total debt the company carries.
More broadly, the natural gas industry is languishing from the old commodities conundrum of too much supply and not enough demand. Yes, “natty” burns cleaner and is cheaper than oil, but it’s still considered a fossil fuel and one that’s falling out of favor in the U.S. energy mix as renewables’ costs decrease while adoption increases.
Chesapeake is attempting to diversify its production mix to include more oil and less natural gas, something that would be admirable if not efficacious if oil prices were high. They’re not. West Texas Intermediate (WTI), the U.S. benchmark, currently resides around $30 per barrel and is in the grips of a bear market.
Near-term catalysts for oil are likely to boil down to professional traders covering short positions and some bargain hunting, neither of which will prove meaningful enough to materially alter Chesapeake’s downward trajectory.
Bottom Line on CHK Stock
Chesapeake’s woes should not be conflated with the death of the broader natural gas industry, no matter how low CHK stock falls. Even under the rosiest of assumptions for renewables, gas is expected to remain an integral of the global energy mix over at least the next two decades.
As the Center for Strategic and International Studies (CSIS) notes, about 60% of gas demand goes “goes mostly into buildings, for space and water heating as well as cooking, and into industry, largely as feedstock or for process heat.”
Those are steady demand avenues, but Chesapeake hasn’t shown an ability to truly capitalize on that theme and the company could struggle to keep itself around for what would be an admittedly surprising uptick in natural gas demand that could be three, five or 10 years out.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.