Chesapeake Energy Is a Surefire Bankruptcy Candidate

Advertisement

[Editor’s Note: This article was updated on May 1, 2020, to correct that Franking Advisers is not currently Chesapeake’s largest shareholder.]

Chesapeake Energy (NYSE:CHK) is about to become an unfortunate victim of the current economy. CHK stock is down nearly 84% so far this year, but that doesn’t make it a bargain. The dip in oil prices coupled with the aftermath of the novel coronavirus pandemic doesn’t bode well for the firm.

Chesapeake Energy Is a Surefire Bankruptcy Candidate
Source: Novikov Aleksey / Shutterstock.com

While InvestorPlace’s Larry Ramer laid out some scenarios in which Chesapeake might escape bankruptcy earlier in April, even he’s skeptical. He pointed to the fact that one of Chesapeake’s largest shareholders, Franklin Resources, not being optimistic about the firm’s prospects as a reason to doubt a comeback.

“The company’s lead shareholder, Franklin Resources, is reportedly ‘taking steps to prepare for a potential debt restructuring or bankruptcy.’ I’m sure that Franklin is well-aware of the company’s difficulties and is taking those steps for good reason”

Yes, unfortunately despite the company’s best efforts it looks like Chesapeake is heading to zero — and soon.

CHK Stock Narrowly Avoided Delisting

Back in mid-April Chesapeake avoided being delisted from the New York Stock Exchange by executing a reverse stock split. The move consolidated every 200 existing CHK shares into one, boosting the share price from 13 cents to $16.80. Without the split, Chesapeake would have been in danger of becoming de-listed because of its sub-$1 share price.

Management really had no choice but to execute the split, but the move likely only bought the firm some time. It didn’t do anything to address the underlying reason investors have abandoned CHK stock — debt, debt and more debt.

Deteriorating Market Conditions Crush Chesapeake

Before the coronavirus had ripped through the U.S. and brought the global economy to its knees, Chesapeake had a plan. Although it was carrying around $9.08 billion worth of long-term debt, it expected to pay off some of its obligations via asset sales. At the time, even that was a risky strategy.

But now that the economy has hit a roadblock and oil prices have fallen off a cliff, that strategy is essentially impossible.

Now, the firm is shouldering a huge debt obligation with no way to pay it off. While prices have stabilized somewhat in recent days, no one is expecting a full recovery anytime soon. Even amid a production cut and the end of a price war between Saudi Arabia and Russia, oil prices simply can’t recover because the demand isn’t there.

Of course, economies around the world are slowly coming out of hibernation, but the keyword here is slowly. There’s no way with unemployment in the U.S. at an all-time high, and travel around the world essentially halted, that oil prices can rise much higher.

Debt Downgrade

At the time of writing, Brent crude was trading at $25 per barrel. WTI was down to $17.41 per barrel. If things miraculously start to move faster than expected, we won’t run out of places to store oil. But that’s a best-case scenario.

So, what can Chesapeake do with all of its debt? According to Moody’s, nothing. CHK is getting closer and closer to defaulting on its loan obligations. The rating agency downgraded Chesapeake’s debt to ‘C.’

That’s the final rung Moody’s has to offer for debt that hasn’t already defaulted. The subtext for those still holding CHK stock is, “get out now while you still can.”

More Proof in Bonds

If you need more persuasion that Chesapeake stock is heading to zero, you need only look to the bond markets. My colleague Ian Bezek pointed out just how cheap Chesapeake bonds have become earlier this week. The bonds were trading between 5 cents and 15 cents on the dollar. That kind of incredible discount is a testament to how much longer the bond market believes the company can remain solvent.

Given the ludicrously low price there, it should be clear that the company is highly likely to go bust in the near future. The bond market isn’t stupid; after all, it’s not just giving away free money here.

The Bottom Line

Investing in an oil and gas major right now is risky. Investing in a company like Chesapeake whose business was already under pressure going into this crisis is suicide. It’s only a matter of time before the company goes bust and shareholders will be left with nothing.

Laura Hoy has a Finance degree from Duquesne University and has been writing about financial markets for the past 8 years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.

Marie Brodbeck has a Finance degree from Duquesne University and has been a financial journalist for more than a decade. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN.


Article printed from InvestorPlace Media, https://investorplace.com/2020/04/chk-stock-is-going-to-zero/.

©2024 InvestorPlace Media, LLC