If there was any doubt that the coronavirus from China has escalated into a pandemic, this past Monday has removed all ambiguities. It’s been over a decade since we last saw such a severe drop in the Dow Jones Industrial Average. And while all individual sectors are down, certain ones like energy are directly in the crosshairs. So if you’re speculating on weak names like Chesapeake Energy (NYSE:CHK), you better watch out: CHK stock is likely done for.
In one of my previous articles about Chesapeake, I noted that a debt deal to keep the company afloat may attract gamblers. At the time, I used a football analogy. Essentially, the once-proud energy firm was now staring at a fourth-and-very-long situation. It’s not an impossible situation. However, many variables would have to go right for this to work. Moreover, management doesn’t control the variables at play.
The debt deal occurred late last year. Early in 2020, though, a crisis emerged between the U.S. and Iran. When our military forces killed top Iranian general Qassem Soleimani, Iran responded with a missile strike against an Iraqi base housing U.S. service members. And during the strike, Iran accidentally shot down a Ukrainian airliner — a tragically embarrassing moment for the Islamic Republic that killed 176 people.
However, it appeared the situation would be a positive for CHK stock. With potentially a brewing hot conflict between the U.S. and Iran, this would constrain supply and subsequently, skyrocket demand.
But as you know, that didn’t happen. Instead of an epic-scale battle, the world economy was instead impacted by a microbiological threat. And with the spiraling coronavirus now shuttering Italy completely, it’s really lights out for CHK stock.
CHK Stock Is Virtually Bound for Implosion
Let me be clear before I get taunting emails. I’m not suggesting that Italy is the make-or-break nation for CHK stock. Rather, I’m suggesting that the Mediterranean country finally understood the draconian measures necessary to stop the coronavirus. Basically, they took China’s playbook — and it’s this same playbook that other countries will need to adopt to survive.
Yes, I’m talking about the U.S. For some reason, the Trump administration has been slow to respond to the coronavirus. This should concern all Americans, as the daily infection cases rate in the U.S. over the last seven days is 32.8%. Over the same time frame, Italy’s rate is 23.3%. However, we risk the same magnitude of crisis if we continue to operate business as usual.
Naturally, this is a disastrous negative for CHK stock. If the White House orders an emergency shutdown of the U.S. — or even just heavily affected areas — demand would simply crater.
However, if that doesn’t happen, Chesapeake has another, likely insurmountable headwind: rapidly developing tensions between Saudi Arabia and Russia.
In a bid to bolster sagging oil prices, OPEC’s dominant member Saudi Arabia proposed with Russia to mutually cut production. In prior energy crises — most notably the energy market collapse in the middle of last decade — Russia reluctantly cooperated. But, not this time.
From Russia’s perspective, the agreed-upon production cuts in 2016 limited growth of their domestic energy companies. While Russia is emerging as a global economic power, it’s still largely dependent on their natural resources. Clearly, they don’t want to give up this critical lever.
Furthermore, Saudi Arabia and Russia have geopolitical differences. To make a very long, complex story short, the U.S. is allied with the former — while Russia is aligned with Iran. Thus, this impasse may not end soon.
Time Is Not Chesapeake’s Friend
Finally, this brings me to my final argument against CHK stock: it simply doesn’t have the time necessary to convince investors of a second look.
With the coronavirus likely to shut down major economic portals, the demand for traditional energy sources will deflate indefinitely. Optimistically, let’s say that a pharmaceutical firm concocts a vaccine. This will take at least several months to distribute.
Furthermore, the damage to the global economy may take at least a year to unwind. You have to also recognize the potential for certain industries — such as cruise liners –to absorb lasting pain. Obviously, that wouldn’t help Chesapeake’s situation.
And let’s face it: if everything went right in the markets, CHK stock was still a badly flawed investment. Of course, you can still go for it. But know that you’re trying to convert a fourth-and-99 backed into your end zone.
Yes, it could happen, but it’s extremely unlikely.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
