Chesapeake Energy (NYSE:CHK) stock has lost almost 92% of value over the last six months. However, the bad news is the stock is going to be worthless soon due to the energy company’s impending bankruptcy filing.
Although oil and gas prices have recovered after falling to historic lows in March, Chesapeake doesn’t have the legs to survive the financial crisis brought on by the novel coronavirus pandemic. There are genuine concerns that its liquidity could push the company into Chapter 11.
Reuters first reported in April that the company was preparing a bankruptcy filing. Since then, S&P has said that insolvency is a “virtual certainty” for the oil and gas exploration and production company; it’s just a matter of how much time it can buy for itself at this stage.
As the company readies itself for final rites, let’s explore why things went so pear-shaped for Chesapeake, once the face of the U.S. shale gas revolution.
Covid-19 Served As the Death Knell for Cash Flow
The drastic fall in oil prices due to Covid-19 left Chesapeake in a precarious position. The company had shifted its focus to oil a few years back, and it was a sound strategy considering the price per barrel at that stage.
Unfortunately, the current crisis caught the company napping and virtually eliminated its traditional business lines. Chesapeake entered the year having to repay $300 million of debt. It was hoping to sell between $300 million and $500 million to finance this payback. However, the pandemic made sure that this plan went awry.
The only option left was to cut production and capital expenditures to shore up liquidity. However, despite the cuts, CHK is not in a position to repay debt or future interest payments.
Debt Will Force CHK into Bankruptcy
Cash and cash equivalents totaled $82 million in the recently concluded quarter. Meanwhile, interest payments came to $145 million, and therein lies the problem. It’s important to note here that the company will burn through $300 million if it makes it to the end of the year.
So, one can understand why it’s in such a precarious position.
July 1 is probably the key date for the company. That’s when it has to repay $134 million in bond interest on its second-lien notes. The company will ideally want to file for bankruptcy before that time, considering its liquidity position.
Another big talking point for the embattled oil and gas company is its $3 billion credit facility, which has $1.011 billion remaining on it. I expect Chesapeake will draw the remaining funds for bankruptcy proceedings because it will likely violate the 4.5x leverage covenant on the facility before the end of the year.
Will CHK Stockholders Get Anything?
It’s unlikely CHK stockholders will get anything as a result of bankruptcy proceedings. Chesapeake has a lot of debt on its books, and it also has preferred stock to take care of, meaning there’s hardly anything left over for common stockholders. As of March 30, Chesapeake had $9.2 billion of debt on its books and preferred stock of $1.63 billion, both of which are substantial amounts.
Last Word on CHK Stock
I don’t believe CHK stock will close out the year without major restructuring or a bankruptcy filing. The company was betting on oil prices returning to pre-pandemic levels, but that didn’t come to pass, sending its operations into a tailspin. Although energy prices have rebounded slightly, we are unlikely to see any major hikes before 2021.
OPEC+ members have not helped matters by announcing production increases and slashing prices. However, according to the latest news, the organization is likely to reverse the decision, but I doubt it will provide oil prices with enough momentum to run very far.
Covid-19 will also have long-lasting impacts on oil consumption, and until we have a vaccine, energy stocks will continue to bear its brunt.
Chesapeake was hoping for oil prices to return to $60 per barrel or above to sustain its operations. That would’ve helped the company get back to a cash neutral position. In a worst-case scenario, the company was hoping to stave off bankruptcy until 2021, but Covid-19 forced its hand.
As I mentioned earlier, Chesapeake has a multi-layered capital structure that will leave little to nothing for shareholders. In summary, if you haven’t sold your position until now, time is running out.
CHK stock is a sell.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.