Chesapeake Energy (NYSE:CHK) stock has been making all sorts of headlines over the past week. Unfortunately, for CHK stock investors, it’s been uniformly bad news. Bankruptcy attorneys, going concern warnings, record-breaking losses, and more. the energy company’s situation is clearly dire.
Yet, even now, Chesapeake shares still trade hands for more than $9 each, and the company has a market capitalization of more than $93 million. For an apparent dead company walking, a lot of folks haven’t given up yet.
But don’t get your hopes up. There’s no reason to expect Chesapeake to be able to stay in business past this summer, when it has significant debt coming due. Some speculators have latched onto hopes that something, such as the recent rally in natural gas prices, could save Chesapeake. But, by all accounts, the situation is too far gone to be salvaged at this point.
Not Like Other Natural Gas Stocks
I know there’s been some excitement around Chesapeake because the broader natural gas space has been surging. The demand for oil has collapsed, causing various side effects. For example, many shale producers are starting to curtail production. This, in turn, lowers the supply of natural gas, as shale oil rigs stop producing associated gas as well when they are turned off.
Also, since natural gas is used more for electricity than transportation, demand has held up far better than for gasoline, jet fuel and other refined oil products. Long story short, natural gas prices are on the rise as traders factor in this information. Shares of distressed natural gas producers are up big. Antero Resources (NYSE:AR) and Range Resources (NYSE:RRC) have quintupled and quadrupled off their recent lows, respectively.
Some traders are thinking Chesapeake might enjoy similar fortune. But it simply won’t be. For one, Chesapeake has much more exposure to the price of oil than those firms, so the switch in momentum from oil to natural gas is much less beneficial. Secondly, while those firms are distressed, they don’t have debt due immediately, and their overall debt loads are much smaller. The struggling natural gas companies still have a plausible path to survival. Chesapeake does not. Thus, don’t buy CHK stock anticipating the same sort of squeeze, as it isn’t likely to happen.
Beyond Awful Earnings
If you want proof of Chesapeake’s uniquely bad operating position, just look at their last earnings report. The company somehow managed to generate EPS of -$852.97. That’s not a misprint, Chesapeake managed to generate a loss of dozens of times its share price in a single quarter. 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.
Beyond the outlandish headline loss, more bad news ensued. The company gave official notice that it is in danger of no longer being a going concern. Companies state that when there is substantial doubt about whether they have enough funds to meet their short-term obligations.
To that end, The Wall Street Journal reported that Chesapeake, along with Franklin Resources (NYSE:BEN), which owns a large stake in the energy firm, have hired lawyers to prepare potential paperwork for a bankruptcy filing. The writing is on the wall here.
CHK Stock Verdict
There’s virtually no way Chesapeake could have more red flags right now. The company’s last earnings report was bad almost to the point of comedy. In addition to the jaw-dropping loss, management’s also told you that the company may stop being a going concern in the near future. The credit ratings agencies agree with that opinion. As does the bond market. Chesapeake’s bonds are selling for pennies on the dollar.
All signs point to Chesapeake using the bankruptcy process to wipe away its debt and get a fresh start. There’s no reason to fight the obvious here.
Charles Sizemore put it well recently when he said “Don’t Even Think About Buying The Dip” in Chesapeake’s shares. He concluded that the best possibility for Chesapeake was a managed restructuring where equity-holders would get some small piece of a reorganized company. And that was before Chesapeake dropped their abysmal earnings report on the market a few days ago — the prospects of recovery have dimmed even further as a result.
Yes, I know the stock is down dramatically. A lot of short sellers are involved. It could squeeze in the very short term. But Chesapeake is overwhelmingly likely to end up at $0, and to do so in the near-future. Owning it for any reason at all is to tempt disaster. Just stay away.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a junior analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.
