Chesapeake Stock Has Problems That Go Beyond a Virus

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At a time like this, speculative investors might think that Chesapeake Energy (NYSE:CHK) stock is so cheap that it has to go up. But there’s little reason to believe the stock has any bounce left. When I first wrote about CHK stock, in December, it was trading for 83 cents per share.

This Reverse Split Will Do Little to Improve the Outlook for CHK Stock 

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By the end of January, when I wrote another cautionary article about the company, its shares were approximately 30 cents lower. And as of this writing, Chesapeake has dropped about another 30 cents.

The Entire Oil Sector Is Under Pressure

Some believe that CHK stock has tumbled due to the coronavirus from China. But the price of oil plunged by the largest amount in decades yesterday.

According to The Guardian, Saudi Arabia  plans to raise its oil production in April. This move is being seen as retaliation against Russia after the latter country  refused to reduce oil output, which would have helped to put a floor on oil prices.

However, in perhaps another example of the law of unintended consequences, the increase in Saudi production is likely to have an adverse effect on the shale sector, including Chesapeake.

“This was literally the last thing U.S. high-yield energy producers needed,” said John McClain a portfolio manager at Diamond Hill Capital Management.

Falling Oil Prices Will Lead to Higher Borrowing Costs

To be fair, falling oil prices caused by the coronavirus are a contributing factor to the slump of CHK stock. As Chris Tyler wrote in a recent InvestorPlace article, blue-chip energy companies are seeing their stocks get decimated. For example, Chevron (NYSE:CVX) and ExxonMobil (NYSE:XOM) are trading at three-year and ten-year lows, respectively.

But Chesapeake Energy had problems before the virus. And those problems are only being magnified by the falling oil prices. Its big problem, as InvestorPlace’s Will Ashworth pointed out, is its debt.  Servicing that debt will be a pressing concern for the company.

As Ashworth outlines, Chesapeake is taking the necessary steps. It’s undergoing a reverse stock split and tapping into a $3 billion credit facility. It’s also announced that it will look to sell off assets. Those are all moves of a company that’s playing defense.

But at the end of 2019, Chesapeake had $8.9 billion of outstanding debt and it had just under $8.6 billion of total revenue that year. Now consider that over the next five years, the company will have to retire $4.9 billion of debt with interest payments totaling another $3.1 billion. And that doesn’t factor in what will surely be the rising cost of servicing that debt.

The Bottom Line on CHK Stock

Some believe that the shale industry is notorious for violent, up-and-down swings. Optimistic investors will say that when oil prices rise, so will the outlook for shale. That may be true for companies that are dealing from a fundamental position of strength. But right now Chesapeake has too much debt and not enough revenue. And worst of all, it does not have enough time.

Chesapeake is telling its employees that it’s throwing in the towel. After all, if the company is selling off its assets, how will it be in a position to take advantage of a turnaround of oil prices?

This is really just the end of a long and winding downward spiral. CHK stock peaked in 2008 and has been in a declining pattern ever since. Chesapeake is trying to do what it can, but that’s not nearly enough.

As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019.


Article printed from InvestorPlace Media, https://investorplace.com/2020/03/chk-stock-woes-more-than-virus/.

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