Chesapeake Stock Might Be Worthless at Current Energy Prices

Advertisement

With a looming global recession, energy prices have been depressed, and that has translated into huge declines by oil and gas stocks. Chesapeake Energy Corporation (NYSE:CHK) has been among the worst hit in the current crisis. CHK stock currently trades at 17 cents and has tumbled by 96% from its 52-week high of $3.57. I fear the worst for the stock, and this column will discuss the reasons for my this ultra-bearish view on the shares.

Source: Casimiro PT / Shutterstock.com

First, with a global recession and an oil price war, it’s unlikely that oil will trend higher anytime soon. Indeed, the idea of a negative oil price is now being discussed. Further, natural gas prices are also at a multi-year low and are unlikely to surge tremendously. Energy prices will likely remain weak through fiscal year 2020 and potentially into FY21. This outlook spells disaster for over-leveraged companies like Chesapeake Energy.

As a matter of fact, Chesapeake Energy has already appointed debt restructuring advisers,. and the company may be considering filing for Chapter 11 bankruptcy.

A Perspective on Valuation

As of December 2019, Chesapeake Energy reported total proved reserves of 1,572 million barrels of oil equivalent (MMBOE). Based on the reserves, the company’s present value of estimated future net revenue (PV-10) was $9 billion. This PV-10, however, was calculated based on an oil price of $55.69 per barrel and a natural gas price of $2.58 per 1 nillion BTU.

Currently, Brent oil is trading below $30 and natural gas trades at $1.70. Clearly, Chesapeake’s present PV-10 valuation is lower than its previous estimate.

And Chesapeake Energy had total debt of $9.0 billion as of FY19. Assuming a liquidation scenario, the company’s equity would be worthless, even if the company is worth $9 billion.

Therefore, at current energy prices, a market capitalization of $335 million is justified for an over-leveraged company like Chesapeake Energy. The sustained selling pressure on CHK stock is therefore not surprising.

Extended Debt Maturity Does Not Help

Before the energy price collapse and the economic downturn, I was relatively optimistic on Chesapeake Energy. A key reason for my upbeat view was the company’s success in extending its debt maturities.

In  the current year, $302 million of the company’s debt is due to mature The challenge is that Chesapeake Energy was expected to sell $300 million to $500 million of its non-core assets to repay the debt. Given the current outlook of the energy industry, I don’t expect it to be able to sell its assets.

A more concerning point is that the company’s latest annual report talks about total contractual cash obligations of $2.4 billion for the current year. That includes $705 million of interest payments.

Given the fact that Chesapeake Energy has hedged its oil and gas positions, servicing its debt  might not be a challenge. However, the company’s cash requirement for the year is not limited to debt servicing.

With a cash balance of just $6 million as of December 2019, Chesapeake Energy is in troubled waters. The owners of CHK stock will point to the fact that the company has an undrawn credit facility of $1.3 billion.

However, I must point out that the company’s borrowing limit is scheduled to be reevaluated the current quarter. Considering the current state of the energy markets, it’s entirely likely that its limit will be scaled down. That would leave Chesapeake Energy with very limited financial flexibility.

Chesapeake Energy has total contractual cash obligations of $3.9 billion for FY21 and FY22. That leaves the company with limited breathing space if energy prices continue to be low for an extended period of time.

My Final Views on CHK Stock

Chesapeake Energy might still manage to report positive operating cash flows in the current year, considering the hedges it made on energy prices. However,  the company will still face a cash crunch and a working capital crisis.

Given the current state of the energy sector, its ability to borrow more or issue more shares of stock  also seem to be limited. In all probability, the company is heading for a major restructuring or a Chapter 11 bankruptcy filing. In either scenarios,  CHK stock won’t do very well.

The collapse of energy prices will victimize a number of over-leveraged companies. Chesapeake Energy certainly seems to be headed in that direction.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.


Article printed from InvestorPlace Media, https://investorplace.com/2020/04/chesapeake-stock-might-be-worthless-at-current-energy-prices/.

©2024 InvestorPlace Media, LLC