Energy prices may be rebounding. But that doesn’t make Chesapeake Energy (NYSE:CHK) a great opportunity. With ratings agency S&P Global saying a debt default is likely, there’s plenty of downside risk with CHK stock.
Yet, what if the company avoids bankruptcy? Sure, shares could make an epic rally if they manage to ride out the storm, and avoid a default. But, given the very slim chance of that scenario panning out, the odds are not on your side.
The recent reverse stock-split may have taken away their “penny stock” status. However, this does little in terms of improving the underlying situation with the company. As I wrote back in January, the company was already in a bad place, even before the recent collapse in energy prices.
Too much debt, not enough cash flow, has been a problem for years with the company. Considering that happens while the economy was firing on all cylinders, today’s slowdown provides an even tougher environment for this company.
To top it all, the potential rebound in natural gas prices could be “too little, too late.” With two key debt obligations soon coming due, the company may be on the fast track to Chapter 11.
With this in mind, CHK stock should be at the bottom of your list for potential energy plays. Let’s dive in, and see why shares remain a hard sell.
Potential Rebound “Too Little, Too Late” for CHK Stock
As I mentioned above, tough times continue for natural gas. Despite futures prices briefing bouncing from around $1.60 to about $2 per million BTUs (British Thermal Units), prices are heading back down, on news of a larger-than-expected build on stockpiles.
However, natural gas prices could move higher through the end of 2020. Analysts at Saxo Bank said that natural gas could be a “potential winner,” as oil companies cut production. A cut in crude oil production means less associated gas, or the natural gas found alongside oil deposits. This should help reduce supply, helping to move prices higher, even as demand remains weak.
But, is a rebound in natural gas prices enough to help CHK stock avoid default? Even if the aforementioned rebound does happen, it could be “too little, too late.”
As InvestorPlace’s Ian Cooper discussed May 4, has two major debt obligations of $136 million and $192 million, maturing in July and August, respectively. As of December 31, 2019, the company had just $6 million in cash, against over $9 billion in long-term debt.
The company is set to provide financials for the period ending March 31 sometime this month. With energy demand plummeting, it’s hard to believe the company’s cash position has improved in recent months. With this in mind, it’s doubtful they’ll be able to avoid defaulting on their debt.
Shareholders Lose
As seen from reports from Reuters late last month, Chesapeake could already be preparing for bankruptcy. What does that mean for investors jumping into this stock today? The company itself may continue to exist. But don’t expect common shareholders to be saved in a Chapter 11 scenario.
Chances are, a Chapter 11 bankruptcy will result in a reorganization of the company’s ownership. In short, creditors will become shareholders. Does that mean CHK stock goes to zero? That depends. In a similar scenario, one of the company’s peers recently went into Chapter 11.
The result? Common shareholders received just 3% of the equity in the reorganized company. Granted, that wasn’t a total wipeout, but a 97% loss might as well be a complete loss in the grand scheme of things.
Simply put, if you’re looking to speculate in Chesapeake shares, you have to prepare to take a complete loss. Or, at the very least, a loss of more than 90%.
To make this worthwhile, shares need to have the potential to rebound significantly. Not just 50%, or even 100%. I’m talking higher than that. But, considering the remote chances of this happening, it doesn’t look wise to jump in at today’s prices.
The Bottom Line on CHK Stock
Chesapeake has been all but written off. The recent reverse stock split kept shares trading on The New York Stock Exchange. But this does little in terms of helping the company avoid Chapter 11. With a high chance of the company reorganizing in the near future, investors should expect either a total loss or heavy dilution that’s practically a total loss.
With this in mind, this is not your energy rebound play. There are better energy stock ideas out there, like Marathon Oil (NYSE:MRO), which represents a stronger high-risk/high-return opportunity.
Bottom line: there are better contrarian energy plays out there, don’t waste your time and risk your money with CHK stock.
Thomas Niel, InvestorPlace contributor, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
