With Low Oil Prices and High Debt, CHK Stock Is Toast

Given the economic devastation resulting from the novel coronavirus, red has become a common color in the investment markets. But for beleaguered energy firm Chesapeake Energy (NYSE:CHK), it may be a permanent one. In short, this is an organization that has completely lost control of its trajectory. Therefore, barring a miracle, CHK stock will probably deteriorate into nothing.

With Low Oil Prices and High Debt, CHK Stock is Toast
Source: Casimiro PT / Shutterstock.com

Early last week, Chesapeake executed a 200-for-1 reverse stock split. Frankly, all this did was to temporarily shock those who haven’t been paying attention to CHK stock daily. Also, management bought some time to prevent shares from getting delisted from the New York Stock Exchange. Clearly, though, these are the actions of a desperate company fighting for its life.

I don’t blame the leadership team for getting the reverse stock split done. I’d do the same because honestly, that’s the only move available. I liken the situation to a football game where the opposing coach burns through their timeouts in the off chance that something, anything, could happen.

Again, barring some divine intervention, CHK stock is done. Combined with previously bad decisions and painful concessions to stay alive, Chesapeake is walking a tight rope. Further, that rope is shortening as the company risks breaching its debt covenants.

Unfortunately, the only hope here is to see a recovery in oil prices. But as I’ve stated many times, the issue isn’t about supply. OPEC and its cronies could cut production to zero. Without demand, even the big boys like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) will suffer volatility.

An embattled outfit like Chesapeake? Unless you just want to burn your stimulus check, I’d stay far away from CHK stock.

Why the Only Price for CHK Stock Is Zero

In the oil market, the biggest news item was, of course, the rift between Saudi Arabia and Russia. In a shocking decision, the Saudis unleashed a torrent of oil as retaliation for Russia not agreeing to cooperative production cuts.

Well, that deal finally came to fruition, with the warring sides agreeing to a record production cut. On that, it was reasonable to assume that we’d see some sentiment shift in oil, if only temporary. However, this wasn’t to be as “black gold” posted its seventh negative week over an eight-week period.

As expected, CHK stock suffered loss after ugly loss last week. Sadly, I don’t see a bottom in sight, unless by bottom you mean six feet under.

In addition to the unprecedented demand erosion for energy, I recognize the possibility of a severe market downturn. Using data from the Dow Jones index going back to 1900, there have been 24 quarters which suffered losses of 10% or greater against the sequentially prior quarter. During the post-World War II era, we’ve suffered 10 such quarters, more so than during the Great Depression era.

Dow Jones' historical performance following a 10% quarterly loss
Click to Enlarge
Source: Chart by Josh Enomoto

But the difference is that we have recovered relatively quickly following such sharp market downturns. Therefore, we have enjoyed far more bullish quarters than bearish. Yet if long-term market cycles repeat – as they tend to do — we could incur a paradigm-shattering period of negativity.

Currently, we’re on track to register a loss of nearly 14% for the second quarter. How our major indices respond over the next two-and-a-half months will give us an indication of our economy’s overall health.

However, the signs are already ominous. And this is especially so for extremely vulnerable names like CHK stock.

Time Is Just About Running Out

At time of writing, the price of Brent Crude is under $30, while West Texas Intermediate is a hair above $25. At these prices, there’s no way that Chesapeake can survive.

I’d like to think that some reason for optimism exists, but I just can’t find it. For instance, 5.2 million Americans recently filed for unemployment benefits. Over a four-week period, more than 22 million workers have lost their jobs. Of course, that translates to millions of cars collecting dust in garages and parking lots, depressing oil prices.

Additionally, airliners, cruise ships and the entire travel industry is under the gun. Even with ridiculous discounts on fares, nobody wants to go anywhere, even if they could.

Finally, let’s not forget that Chesapeake was up a very smelly creek without a paddle before the coronavirus. But with this catastrophe, CHK stock is merely waiting for its execution date.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.


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

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