Chesapeake Energy (NYSE:CHK) is likely to go bankrupt soon. As a result, CHK stock is likely worthless now — or at least close to it. Investors would do well to stay clear of the stock.
On May 1, 2020, S&P Global Ratings wrote that, according to Bloomberg, it was a “virtual certainty” that Chesapeake Energy would either file for bankruptcy or a distressed restructuring within the next several months. This is because certain debt payments are due in July and August.
S&P decided to cut the credit rating of the company to CC from CCC as a result of its estimate. This puts Chesapeake Energy well below investment grade, where the lowest level is BBB- for the aforementioned ratings agency.
Where Do Things Stand With Chesapeake’s Liquidity?
I tried to warn readers about this expected bankruptcy filing last month, when I wrote that “Chesapeake Energy Is Headed Towards Bankruptcy.” I explained the roots of the problem and why the reverse stock split wouldn’t act to preserve any kind of value for CHK stock.
Yes, oil and gas prices are headed higher. But that’s not likely to change anything. Chesapeake has too much debt on its balance sheet. It must pay $135 million in interest in July and $208 million in debt maturity principal in August.
On Feb. 26, 2020, when Chesapeake announced its earnings for 2019, it indicated that it would fund those payments through expected asset sales. The company expects to sell between $300 million to $500 million in assets. So far, as of May 11, the company has not announced any asset sales.
Moreover, investors are not even clear on the company’s current liquidity situation. As of the end of December, the company had just $6 million in cash on its balance sheet and over $9.5 billion in debt. When the company filed its Form 10-Q with the U.S. Securities and Exchange Commission on May 11, it showed $82 million in cash and $9.5 billion in debt.
One sign of its liquidity troubles is a Reuters report from the end of April that a pipeline operator for Chesapeake was suing it for $49 million. Apparently the vendor has not received payment even after renegotiating with Chesapeake. If a number of creditors try to get payments this way, it will force Chesapeake to seek protection with the courts in a bankruptcy filing.
What’s Next for CHK Stock?
Let’s be very clear here. Chesapeake stock will be worthless if the company files for bankruptcy or seeks a detailed restructuring.
Bloomberg reports that S&P believes that bondholders will be seeking 10 cents on the dollar for their debt investments. That leaves nothing for equity holders. One Seeking Alpha contributor wrote recently that Chesapeake bonds are trading at 5 cents on the dollar.
So what do you think you should do? If you own CHK stock now, either because you think it might be worth a potential pop up, or because you are a legacy holder, don’t get your hopes up.
Often a stock like CHK will trade for months even after the company has filed for bankruptcy. This is not uncommon. I have even seen a company put out public statements that its common stock is worthless based on bankruptcy. The idea is to keep widows and grandmothers, or other unknowing investors, from keeping on holding it.
Obviously, it will be better for you now to take action before any filing or restructuring agreement is made. This is because the stock is likely to take a hit once that occurs.
By the way, if all these arguments don’t convince you, consider this. Its May 11 price of $12.90, without the recent 200-for-1 reverse split, would be 6.45 cents per share. Would you really invest in a stock with that price?
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.
