I wrote last week that Chesapeake Energy (NYSE:CHK) was likely to enter bankruptcy and CHK stock was likely worthless. This still seems likely, particularly after the stock took a huge 66% fall on Tuesday.
I pointed out that Chesapeake Energy said in its 10-Q there is substantial doubt that it can continue as a going concern. Bloomberg News recently underlined this possibility with speculation that it could file for Chapter 11 by June 15.
That is what Whiting Petroleum (NYSE:WLL) did and about which I have written several articles. Oil stocks spiked on Friday after OPEC called a weekend meeting to keep production cuts in place. By Sunday, June 7, it became clear these cuts would last another month, keeping the price of oil higher.
A Huge Spike and Fall for CHK Stock
Chesapeake saw a huge rise and fall this week. The leap higher was triggered by OPEC’s announcement plus surprise Friday payroll data that makes it clear that demand for goods and services is going higher as well. That’s a good recipe for higher oil prices.
Embattled Chesapeake stock jumped because higher oil and gas prices could theoretically give the company more options as it struggles to avoid bankruptcy. In the first quarter, Chesapeake produced $397 million in cash flow from operations (CFFO). This came from its producing energy assets, including interests in approximately 13,700 oil and natural gas wells.
But that wasn’t enough to cover $501 million in capex spending on new wells. The average price of oil in the first quarter was $46.98 per barrel; now oil prices are just starting to approach that level again.
Bulls had a field day on Monday as Chesapeake stock skyrocketed, blasting from about $14 per share to nearly $70. But the gains were short-lived.
On Tuesday, Bloomberg’s report about a likely bankruptcy sent investors running for cover, and the New York Stock Exchange temporarily halted trading of CHK stock. By the closing bell, Chesapeake had fallen 66% to nearly give back all the gains it had earned on Monday.
Chesapeake Energy Filled With Debt
As of March 31, CHK had more than $9.5 billion in total short-term and long-term debt. But it had just $82 million in cash. Shareholders’ equity was negative $3.9 billion.
The company has $420 million in maturities due in 2020 as of its latest 10-Q. So theoretically that payment could be made from a mixture of cash flow, asset sales, new debt and/or restricted debt. With a higher stock price, the company could also potentially sell a dilutive equity stake in the company for a portion of that maturity.
But it also needs to cover its other current liabilities, that total $2.26 billion, including its current long-term debt maturities. Since, at best, CFFO will only be $200 to $300 million in Q2, there seems little way to accomplish this without a major restructuring of its debt.
For example, Chesapeake Energy’s market value is only $230 million. The stock would have to rise at least 9 or 10 times more in a short time frame. This would be the level where it would raise enough equity capital from investors that could make a dent in its current liabilities.
CHK Stock Might Have No Residual Value
There is almost no possibility that the common stock might have residual value in a restructuring. It would depend on bankers’ and noteholders’ willingness to grant common stock shareholders something. The fact that Whiting Petroleum shareholders will get a 3% stake in the restructured company might also act as a sort of precedent.
So even if that is the case, the residual stake is likely to be quite small for CHK stock owners today. There is also no way to judge the residual value of that restructured equity stake. The most likely value will be zero.
So, therefore, I still think CHK stock is a crapshoot for investors in the company. To invest in CHK stock now would be nothing short of pure gambling and speculating, not worthwhile investing.
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.
