There’s just no hope for Chesapeake Energy (NYSE:CHK). But this is nothing new. In fact, I’ve said this many times. Unfortunately, each time I’ve weighed in on the CHK stock, the news has only gotten worse. This time, with high levels of debt, decimated energy prices, and a tumbling stock price, even Chesapeake realizes its time has come.
Granted, its stock rocketed from a low of 19 cents to $31, but that came at great expense to shareholders in a 200:1 reverse stock split. In short, for every 200 shares owned, you now own one share of Chesapeake. All done to prop up a dying company from penny stock status.
The only thing I’m shocked by are the investors bidding the diluted stock higher on hope. Every time I’ve highlighted CHK, I’ve said it’s a dud. And unfortunately, I was right. If you’re even thinking about buying the energy stock, stop.
Heading for Bankrutpcy
Just this week, the company said it doesn’t expect to be able to meet its financial obligations, and is now preparing to file for bankruptcy.
“Based on our current forecast, we do not expect to be in compliance with our financial covenants beginning in the fourth quarter of 2020. Failure to comply with these covenants, if not waived, would result in an event of default under our revolving credit facility, the potential acceleration of outstanding debt thereunder and the potential foreclosure on the collateral securing such debt, and could cause a cross-default under our other outstanding indebtedness.”
It’s why the company has engaged advisors to assist with potential Chapter 11 bankruptcy, as it highlighted in a recent 10-Q SEC filing. In short, it’s a terrible time to even consider this stock.
This comes as no shock at all. Making things a bit worse, Chesapeake has $9 billion in debt. It owes toward a $136 million debt obligation in early July 2020, and a $192 million obligation in August 2020, which it may not be able to pay, as I’ve noted.
It also comes as no shock that analysts are cutting their estimates to zero, with strong sell ratings. CFRA analyst Paige Meyer, for example, just cut her target to zero because bankruptcy is likely this year. “We do not expect [Chesapeake] to be in compliance with its financial covenants beginning in Q4 2020, which would result in an act of default on the credit facility,” Meyer wrote in a note to clients. “With a default on the credit facility, we believe other lenders are likely to call debt due as well using ‘cross default’ clauses.”
CHK Stock a Slow-Motion Train Wreck
Not only did Chesapeake Energy cut its dividend after a 200:1 reverse split, it generated an EPS loss of -$852.97, wrote InvestorPlace contributor Ian Bezek. “By comparison, the company only lost $6 per share in the same period last year. The huge loss was largely a result of the company writing down $8 billion of oil and gas assets due to the fall in prices.”
The writing is on the wall for Chesapeake Energy. With far too much debt, and its own concerns it cannot meet financial obligations, CHK stock is headed to zero. While the 200:1 reverse stock split will keep it on the NYSE for a bit longer, it won’t prevent the inevitable here.
It’s time to just let CHK stock go.
There are far better ways to trade a future rebound in natural gas, than with a stock that can’t get its own house in order. Bottom line — don’t waste your time with Chesapeake Energy. It’s time has come to close up shop and move on.
Ian Cooper, an InvestorPlace.com contributor, has been analyzing stocks and options for web-based advisories since 1999. As of this writing, he did not hold a position in any of the aforementioned securities.
