Chesapeake Energy (NYSE:CHK) should officially file for bankruptcy any day now, causing CHK stock to drop sharply. Investors speculated that the firm could file for bankruptcy late last week. But the company did not announce that it had done so.
When Chesapeake makes an official announcement, the company, which has been wildly mismanaged for more than a decade, will disappear. Franklin Resources, which will lead Chesapeake’s restructuring, will eliminate $7 billion of its debt.
Chesapeake began 2020 with more than $9 billion of debt. Over the last few years, the company has successfully reduced its debt from $16 billion to $9 billion. The pandemic however, dealt the fatal blow to Chesapeake. That said, the company had long had questionable business practices and made multiple bets on commodities that didn’t pan out.
Chesapeake And CHK Stock Were In Limbo
The company’s most recent 10-Q made clear that it might not be able to remain a going concern. At issue was whether Chesapeake was eligible to file for Chapter 11 bankruptcy.
Now that Chesapeake appears poised to file for Chapter 11, it will likely be able to stay in business. But the company’s stock may soon be worthless. And unfortunately, the owners of CHK stock are also last in line when it comes to receiving liquidated assets.
The Status of CHK Stock Is Up in the Air
Regarding the company’s stock, Chesapeake’s management will have to decide between two courses of action. The company may de-list its shares from the NYSE and then have them re-listed with a ‘Q’ attached to their symbol. In that case, its stock that’s trading now will still have value, although it’s likely to be worth very little.
In the other scenario, the company will cancel its old shares and issue new ones. Its current shareholders naturally are hoping that it will not decide to take that route.
Are Chesapeake’s Executives Sewing Golden Parachutes?
Back in May, Chesapeake submitted an SEC filing showing that it had paid $25 million to 21 of its executives. Many investors were upset about that, accusing the firm of issuing unwarranted golden parachute handouts and inept management. Some questioned whether the payouts were justified, given Chesapeake’s track record and its debt levels.
Others saw the payments as incentives for its executives to remain with the company during this turmoil. The firm’s CEO, Robert Lawler, and his management team have reduced its debt significantly. Ultimately though, main-street investors are bound to be left with a sour taste in their mouths in the wake of the bankruptcy.
Where Is Cheasapeake’s Stock Going?
Last Monday, CHK stock shot up 64%, only to fall 62% on Tuesday. Markets seem to be behaving in extraordinary ways lately. One strange phenomenon is investors’ appetite for the stocks of bankrupt companies. The rallies of Hertz (NYSE:HTZ) and JC Penney (OTCMKTS:JCPNQ) have been surprising to many market observers.
Also, note the “Q” amended to the end of JC Penney’s ticker. As I explained above, that means that the retailer has filed for bankruptcy, delisted, and relisted.It also signifies that those who owned the stock before the company went bankrupt did not lose all of their money and can still benefit from the gains of its shares. The company was formerly listed on the NYSE under the symbol “JCP”and now trades on the over-the-counter market.
So CHK stock may undergo some changes before the company declares bankruptcy. And if the shares rally this week, most of the gains will be caused by traders trying to eek out a profit from Chesapeake’s dying gasps.
Chesapeake certainly has a long, dark road behind it. Perhaps with a restructuring and new ownership, the company can carve out a new path to profits. But there is no way I could recommend buying the shares.
As of this writing Alex Sirois did not own any shares of the aforementioned stocks.