Don’t Even Think About Buying the Dip in Chesapeake Energy Stock

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It seems like an eternity ago, but Chesapeake Energy (NYSE:CHK) stock started this year at $172 per share, after adjusting for a reverse stock split.

Source: Casimiro PT / Shutterstock.com

How the mighty have fallen. As I write this, CHK stock trades hands at just over $15 per share. That represents a decline of more than 90%.

Alas, the story gets so much worse. Before oil prices started to sink in 2014, CHK stock topped out at nearly $6,000 per share. And if you really want to take a trip through time, shares traded hands at $12,000 per share before the 2008 meltdown.

Source: Chart courtesy of GuruFocus.com

All of these share prices are adjusted for Chesapeake’s 200-for-1 reverse stock split in April, which is itself a source of humiliation for a once-proud company.

Just as a stock split is the sign of a healthy and growing company, a reverse split is generally the sign of a company with little hope of turning things around.

What’s Wrong With CHK Stock?

Chesapeake’s greatest successes are unfortunately the company’s undoing. Chesapeake was one of the leaders of the onshore shale revolution and invested heavily in it. Unfortunately, in a world awash in oil, shale is not the most competitive. Meanwhile, the company has $9 billion in debt to show for its investments and no good way to pay for it.

Source: Chart by GuruFocus.com

Chesapeake piled on debt throughout the 2000s as the shale oil revolution really started to pick up steam. And to the company’s credit, Chesapeake has been steadily reducing its debt load for over a decade now. Unfortunately, it’s too little too late.

Its ability to service its debts has dropped at a much faster rate. Why? Conditions in the oil patch keep deteriorating. Interest coverage (operating earnings divided by interest expense) has hovered around zero for years and is now negative.

Source: Chart by GuruFocus.com

Chesapeake’s cash flow position is a little better than these figures suggest, as they are skewed by high non-cash depreciation expenses. But unfortunately, the company is fighting a losing battle with the credit rating agencies. Reuters announced late last month that the company was considering a bankruptcy filing, and S&P Global Ratings said that bankruptcy was a “virtual certainty” in the next few months.

The agency cut its rating on Chesapeake’s unsecured debt to C, expecting that unsecured creditors would recover 10% to 30% in bankruptcy.

That day may be coming sooner rather than later. Chesapeake has $135 million in interest payments due in July and $208 million debt maturity it will need to roll over in August. To put that in perspective, the entire market capitalization of the company is only $147 million.

Is There Any Hope?

The problems plaguing the energy industry aren’t going away any time soon. The novel coronavirus crisis clearly made the situation vastly worse, causing demand to collapse even while new supply poured online from Saudi Arabia’s price war with Russia. But conditions weren’t exactly great even before the pandemic. The world is oversupplied with oil and gas. It’s really that simple.

There is no realistic way for Chesapeake to grow out of this problem. At this point, the best that investors can hope for is a negotiated debt restructuring that avoids formal bankruptcy and leaves stockholders at least partially intact.

That’s not a bet I recommend you take.

Charles Lewis Sizemore, CFA is the principal of Sizemore Capital, an investment advisory firm based in Dallas, Texas. As of this writing, he did not hold any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/chesapeake-energy-chk-stock-dont-even-think-about-it/.

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