There’s not much life left in Chesapeake Energy (NYSE:CHK) at this point. The energy sector is drowning along with the price of crude oil. CHK stock hit a new record low last week, tagging 12 cents a share.
If you want to call this a positive, Chesapeake has not retested this low from March 9, even as the overall stock market is in near free-fall. But honestly, if an investor’s positive is that shares only fell to 13 cents and not 12 cents, it’s clearly a very distressed situation.
Investors want to know, is Chesapeake Energy heading for bankruptcy, the most dreaded word on Wall Street? For bulls, the situation looks dire.
Chesapeake Bankruptcy? It’s an Option.
Click to Enlarge
Some bulls will certainly push back and say Chesapeake is the buy of a lifetime. Or that the stock could easily double, triple or quadruple in the ensuing weeks.
It’s possible that CHK stock will trade back into even the 40-cent range in the next few weeks or months. But just because a high-risk stock could triple, doesn’t mean I’m interested in the name. Simply put, the fundamentals aren’t there.
Here’s the problem. Chesapeake has very little cash on its balance sheet and current assets of just $1.3 billion. Current liabilities are almost double that at $2.4 billion (a red flag in itself), while $9 billion worth of long-term debt also sits on the balance sheet.
While profitable in two of the past four years, Chesapeake has a net loss of $2.9 billion over that time. Last year, it lost about $300 million and it hasn’t been cash flow positive in any of the past four years.
My biggest issue with CHK stock isn’t where it’s been, it’s where it’s going. In the latest conference call, management noted that roughly three-quarters of its oil production is hedged (thankfully) and that with a notable reduction in capital expenditures, the company should be free-cash flow positive this year.
That will buy some time — if it’s still true.
The company most recently reported earnings on Feb. 26. At that time, crude oil closed at just over $50 per barrel. Now? It’s closer to $30 per barrel. So while roughly 75% of Chesapeake’s production may be hedged, what happens to the other 25%? How does that impact management’s prior free-cash flow forecast? What about future production?
Further, how does it impact the $2 billion worth of debt due at the end of 2022 or the $4 billion due by the end of 2024?
I get it. That’s a ways off. For that matter, so is year-end 2022. But with a stock price trading for pennies and crude oil being obliterated, what bank or lender will want to restructure Chesapeake’s debt?
My Final Thoughts on CHK Stock
Management is planning a reverse stock split to avoid a delisting from the New York Stock Exchange. Assuming the company does it, that will buy Chesapeake some time too. But it may do very little good for shareholders over the long term.
It’s not as if the energy sector is alive and well. It’s getting smashed as a price war breaks out among OPEC members. There may not be a worse time for this to take place, with volatility surging and equities getting hammered.
But here we are, price wars, volatility and all, and CHK stock is still in the discussion. The Energy Select Sector SPDR ETF (NYSEARCA:XLE), Exxon Mobil (NYSE:XOM), BP (NYSE:BP), Chevron (NYSE:CVX) and some of the largest, strongest companies are under significant pressure.
A scenario certainly exists where the weaker players don’t survive this downturn, and CHK stock may very well be one of them.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
