Things already weren’t looking good for Chesapeake Energy (NYSE:CHK), but they’ve gone from bad to worse over the past month. CHK stock closed Friday at $0.18 per share and is down more than 90% from a year earlier.
Things have gotten so dire that the company is reportedly working with restructuring advisors. Chesapeake is weighing its options and considering how it will manage its $9 billion debt load.
Some of the company’s problems can be attributed to recession fears over the coronavirus pandemic as well as the oil price war between Saudi Arabia and Russia. The price of oil continues to go down, recently touching $20.37 per barrel. This is the lowest level we’ve seen since 2002.
But Chesapeake’s problems extend beyond the coronavirus, and at this point, restructuring is unlikely to save them. Let’s look at a couple of reasons why that’s true.
Understanding the Company’s Massive Debt
The biggest problem facing CHK stock is the massive amount of debt it’s carrying. The company has taken steps to try to improve its finances, including eliminating roughly $900 million in debt during the fourth quarter of 2019.
And the company has attempted to sell off some of its non-core assets to chip away at the debt. Management also came up with a plan to reduce its capital spending by 30%.
However, a $9 billion debt load is a heavy burden for any company to manage. Chesapeake is unlikely to get rid of its debt with the actions it is currently taking, and restructuring through bankruptcy may be the only option.
Wall Street Is Losing Faith in CHK Stock
Wall Street doesn’t seem to have high hopes for a Chesapeake turnaround. The stock is currently considered a strong sell on Wall Street and numerous analysts have given CHK stock a target price of $0. Overall, the stock has plummeted 77% since the beginning of the year.
This was already going to be a challenging year for Chesapeake, and the ongoing coronavirus crisis isn’t helping matters. In order for things to really improve for the company, oil and gas prices need to stabilize, which seems unlikely at this point.
If the company is able to successfully restructure its debt or can find a buyer for some of its assets, it may be able to keep trucking along for a little while longer. But even if that’s the case, Chesapeake still remains a risky investment and should probably be avoided for the time being.
Jamie Johnson is a personal finance freelance writer and has been writing for InvestorPlace since mid-2019. She writes for a number of other well-known financial sites, including Credit Karma, Quicken Loans and Bankrate. As of this writing, Jamie Johnson did not hold a position in any of the aforementioned securities.
