“Running on fumes” and “teetering on the brink” are phrases that few companies deserve. There’s one energy company that has absolutely earned those unfortunate descriptors, however. As you’ll soon discover, there’s no shortage of evidence that Chesapeake Energy (NYSE:CHK) stock is quite possibly headed to zero.
Some daring traders might feel that after a recent share-price decline of 90% or so, things can’t get any worse. CHK stock will prove, once and for all, that things can always get worse. It will also be instructive for students of the market to learn which types of companies to avoid if they wish to remain profitable.
A Company in Jeopardy
Plunging oil prices are largely a factor of supply and demand issues. On the supply side of the equation, Russia and Saudi Arabia are engaged in a race to the bottom as they’re both pumping more oil than the world needs right now. On the demand side, the novel coronavirus has made travel, and hence energy usage, impractical.
Oil and gas companies in heavy debt have been hit the hardest by these factors. Chesapeake is among these companies. The likely result for Chesapeake and its ilk, as Credit Suisse explains, will be “further repricing in risk as well as increasing defaults and downgrades.”
Morgan Stanley analysts even went so far as to identify Chesapeake as being at risk of default in less than a year’s time. The fact is, if you’re looking to find CHK stock bulls right now, you might have difficulty finding them in the analyst community.
Why is that? Simple — just look at the data. As InvestorPlace contributor Chris Lau points out, Chesapeake bears a debt burden of nearly $9 billion. To make matters worse, “Chesapeake cannot buy back any of its long-term debt. This implies that long-term debt is worthless.”
Dead and Buried
Lau’s 100% correct conclusion from Chesapeake’s toxic-debt issue is that it suggests “CHK stock will not have any value.” The idea here, we can all surely agree, is not to root for Chesapeake to fail. Rather, we only to acknowledge the inevitable.
Need more evidence? Don’t look now, but shareholders have been invited to what’s essentially a funeral for CHK stock:
“[W]e will ask you to consider and vote … to approve an amendment to our Restated Certificate of Incorporation to effect, at the option of the Board of Directors, a reverse stock split of our common stock at a reverse stock split ratio ranging from one-for-fifty (1:50) to one-for-two hundred (1:200).”
Reverse splits are often the death knell for stocks and the companies they represent. Whether it’s one-for-fifty or (gasp) one-for-two hundred almost doesn’t even matter at this point. Either way, it’s the beginning of the end for a once revered energy giant.
The only factor that might weigh in Chesapeake’s favor is the ultra-low cost of carrying debt nowadays. The Federal Reserve has suppressed borrowing costs to their lowest levels in recent memory. But that, of course, doesn’t wipe out Chesapeake’s massive debt load. At best, it might delay the company’s collapse for a little while.
The Final Word on CHK Stock
The fact that CHK stock fell under 20 cents should only be surprising to the most optimistic of energy-sector traders. Chesapeake’s “F” rating reflects the toxic impact of massive debt. It’s also a warning to investors that it’s best to avoid grasping at stocks as they’re circling the drain.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.