No stranger to volatility, Chesapeake Energy (NYSE:CHK) incurred multiple negative sessions as Reuters reported that the company is preparing bankruptcy filings, according to those familiar with the matter. To say that I’m not surprised would be the understatement of the century. Dogged by unfortunate business decisions and wrestling with a debt load made untenable by the novel coronavirus, CHK stock was doomed. For investors, it was simply a matter of figuring out when.
Though the Covid-19 pandemic has apparently put the nail in the coffin, Chesapeake’s troubles began long ago. Cofounded by the late Aubrey McClendon, the outspoken businessman pushed his organization aggressively toward natural gas. According to Reuters, by 2005, “Chesapeake was the second-largest U.S. natural gas producer,” trailing only Exxon Mobil (NYSE:XOM). However, a glut in natural gas killed prices, sending CHK into a long bearish trend channel.
Today, both corporations are struggling. But for Chesapeake, it’s an existential one.
Of course, Chesapeake’s possible Chapter 11 bankruptcy filing doesn’t necessarily spell the end for CHK stock. But after a likely restructuring, shares will probably be delisted from the New York Stock Exchange. As well, CHK stock faces dilution.
But even with a restructuring, you would do best to avoid Chesapeake. This is a company that is staring down a trifecta of pain.
CHK Stock Loses Badly from Deflated Auto Demand
Just before the pandemic sent the oil markets into the abyss, Chesapeake was attempting to shift its focus from gas to oil production. Sadly, this move was emblematic of the bad decisions that completely changed the company’s trajectory.
Because now, with oil prices plummeting to shocking depths, vulnerable outfits such as Chesapeake increasingly find themselves with limited options. For one thing, Saudi Arabia initially tried to negotiate a production cut among major oil exporters. When that failed due to Russia balking, the two nations entered a shocking price war.
Weeks later, cooler heads prevailed. The two warring sides, along with members of OPEC and their allies, agreed to a historic production cut. However, the move didn’t do anything to bolster prices. As anybody that can read will acknowledge, the problem has never been about supply but rather demand.
Here, various countries’ emergency shelter-in-place orders have not helped matters. Irrespective of the price at the pump, non-essential workers stayed home, preventing any possibility of upside support.
If that wasn’t bad enough for CHK stock, auto sales tanked in April. With consumers focused on surviving this catastrophic crisis, they have no incentive to make big purchases. Frankly, buying a car in this environment is pointless if you’re a non-essential worker.
As our vehicles remain in our garage collecting dust, the prospects for an oil recovery diminishes. Even if the market recovers, it probably won’t recover in time to save Chesapeake Energy.
No One Is Flying
Another important sector for the oil industry is the airliners. Yet again, this is a no-go for CHK stock.
First, jet fuel has cratered to shocking levels. At time of writing, jet fuel prices have collapsed nearly 80% since the beginning of this year. This is about as clear of an indicator as to the horrific demand loss in the travel industry.
As if you needed further confirmation, the major airliners, including Delta Air Lines (NYSE:DAL) and United Airlines (NASDAQ:UAL) reported disheartening declines. In the first time in more than five years, these two heavyweights reported quarterly losses.
Looking ahead into the next quarter, the industry sees more troubled waters. Simply, the coronavirus pandemic has destroyed consumer sentiment, right in the middle of the busy travel season. Therefore, with two key markets out of commission for oil companies, CHK stock will go nowhere but down.
In addition, the speculative contrarian argument really lacks an impetus. Perhaps the best indicator of this is the dramatic rise of Zoom Video Communications (NASDAQ:ZM). As millions remain stuck at home, people have become resourceful, meeting their professional and personal needs online.
But what if that paradigm shift sticks? If we have another outbreak of Covid-19 as White House health advisor Dr. Anthony Fauci suggested, this would reinforce the concept of social distancing and telecommuting in lieu of face-to-face communications.
Essentially, this would represent a tailwind for next-generation companies like Zoom. But for yesteryear organizations like Chesapeake? I just don’t see a realistic pathway to recovery.
Where to Put All This Oil?
Undoubtedly, the biggest shocker in the financial markets last month was oil prices dropping below zero. Basically, this implies that entities would rather pay money not to take delivery of oil. It goes without saying that this was a first in history.
While this looks shocking on paper, it was really the only outcome available. One, the oil price war pushed both Saudi Arabia and Russia to open their spigots full blast. Two, oil demand imploded at the consumer level. And three, with the travel industry decimated, there are currently no derivative uses for crude.
Add this all up and you get a situation where the premium is in storage capacity, which is already filled to the brim. Eventually, we’ll need something crazy to happen to restore any sense of normalcy, such as paying oil firms to put their products back into the earth.
What I do know with reasonable certainty that only the strong will survive in the oil market. Unfortunately, that does not include CHK stock.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
