Describing just how bad things are for Chesapeake Energy (NYSE:CHK) isn’t difficult, and it’s even doable over short time frames. For the month ending May 28, CHK stock is off more than 54%. To put that in context, the Energy Select Sector SPDR ETF (NYSEARCA:XLE) is higher by 7.6%.
There was a modest rally in the stock in April, but Chesapeake isn’t a dead cat bouncing. With its own admission about its viability of being a going concern, the oil and natural gas company may eventually become just a dead cat.
At this juncture, there are shortening odds that Oklahoma-based Chesapeake eventually files for Chapter 11 bankruptcy protection. A few things about that form of going belly up — it allows a company to keep operating and it allows the firm to work out deals with creditors while effectively wiping out common equity holders.
There’s some precedent in corporate America for companies emerging from Chapter 11 and eventually rewarding investors, but those examples often include government assistance. Unfortunately, that isn’t happening for Chesapeake.
Cupboard Is Getting Bare
Chesapeake is saddled with $9 billion in debt. But somehow, it cobbled together $25 million to prepay 21 top executives as a way of motivating them to stick through the rough patch ahead.
The executive pay scheme isn’t surprising given Chesapeake’s track record when it comes to such matters. In 2017, professors at the University of Colorado published a paper entitled “A Culture of Greed at Chesapeake Energy.” The study highlighted the company’s profligate spending, growth-through-debt strategy and excessive executive compensation.
Aside from the poor optics, the energy company has other problems. The debt and potential Chapter 11 filing make it all but impossible for the company to raise capital in the debt markets. Selling assets, which Chesapeake previously did, is also tricky. Shale assets aren’t desirable when oil prices are low and Chesapeake has no negotiating power to wring anything close to top dollar in a sale.
In other words, Chesapeake is unable to hit the bond market and unlikely to adequately monetize its assets. This means it’s more than difficult to put an encouraging value on CHK stock. In fact, CFRA analyst Paige Meyer recently tagged the stock with a “strong sell” rating and a $0 price target.
The Bottom Line on CHK Stock
Over the near term, the best-case scenario for Chesapeake would be landing a loan from creditors to continue operating while going through Chapter 11. That’s not a bad deal for bondholders, though it’s not great, either. Conversely, it’s likely ruinous for shareholders.
Chesapeake has $1.4 billion in cash with which to service some debt. This cash pile could also compel creditors to provide debtor-in-possession financing. However, that’s not free cash. It’s a credit facility that banks could clamp down on if the company’s outlook doesn’t improve.
Adding to the reasons to stay away from CHK stock is that it recently missed a dividend payment on preferred stock. This is similar to not paying interest on a corporate bond.
Bottom line: Chesapeake produces commodities for which prices are low, has a hard time paying its bills and could face imminent bankruptcy. That’s not a stock that’s appropriate for most investors.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.