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Chesapeake Energy and the Death of a Shale Pioneer

Chesapeake Energy's tumultuous relationship with its debt levels led to the company’s demise

In what can only be described as a stock market bloodbath, Chesapeake Energy (NYSE:CHK) finds itself swimming in a sea of red. CHK stock has been a roller coaster ride in the past week and it did not have a happy ending.

chk stock
Source: Casimiro PT / Shutterstock.com

As crude oil prices began to pick up after a monstrous decline, Chesapeake stock rallied at a 450% increase on Monday. Investors raised their hopes for a major comeback, but it was short-lived. The stock price hit rock bottom towards the end of the week from $69.92 on June 8 to just $17.64 on June 11. The stock is trending at $17.55 as of this writing.

Chesapeake Energy’s downfall was partly fueled by a massive amount of debt on its balance sheet and talks of bankruptcy. However, the company faced a slew of issues throughout the years that led to its inevitable decline.

Mounting Debt Led to the Demise of CHK Stock 

Chesapeake Energy started the year on a sour note with a mountain of debt on its balance sheet. The company had ambitious plans to tackle the burden that stood at nearly $9 billion in the current fiscal year. The goal was to offload $300-$500 million of its non-core assets in order to meet its obligations.

However, things were thrown into disarray when oil prices hit a downward spiral as a result of the novel coronavirus. Chesapeake Energy was left with no prospect of an asset sell-off or the opportunity to refinance the business. All arrows pointed to a bankruptcy filing.

The company even made out a $25 million bonus payment to its top-line executives before the Chapter 11 filing was announced.

The Fall of a Shale Giant

Although Chesapeake may be seeing its end days, the company played a prominent role in giving the U.S its title as a top oil producer. Chesapeake was a pioneer in shale drilling that put them in the global spotlight and allowed U.S. oil prices to rise in the years prior to 2008.

While Chesapeake’s shale revolution painted a rosy picture, it is also where the company’s debt problems stemmed from. The company believed that huge gains could be made from drilling for shale in a certain territory. This led to long-term binding contracts with pipeline companies that were a precursor to its impending doom.

Chesapeake was forced to pay a substantial amount of money to its pipeline partners for the upstream, midstream, and downstream activities. The company’s then-CEO Aubrey McClendon wanted to pave the path for natural gas to become the next crude oil.

The risks paid off as the company’s prices soared in 2008, but its newfound fame came at a cost. Chesapeake was locked into commitments for drilling which created a large capital expenditure. As these expenses surpassed their cash balance, it resulted in a massive debt of $23 billion. The company was able to reduce its debt to $11 billion by 2018 through the sale of assets, but the value lingered through the years, leading the company to bankruptcy.

Coronavirus Brought an End to Weak Oil Companies

Prior to the novel coronavirus, many oil companies were hanging by a thread. The winter of 2019 was not a fruitful one for drilling and resulted in low crude oil and natural gas prices. This was made worse by the coronavirus that created a price war among the major oil-producing regions.

With prices as low as $17 per barrel, there was little to no hope for companies like Chesapeake Energy. It was the last straw for the oil producer that was desperately trying to shake down its debt.

As the coronavirus served as a death-knell for the company, Chesapeake is doing some damage control in the days leading up to a bankruptcy filing. The company plans to hand over control of the restructuring plan to its top executives. This partial sale of equity will give them some debt relief.

In most cases, handing over equity control would eradicate return for existing investors of the company. If Chesapeake were to hand over control of the company, investors are unlikely to earn any type of return on their CHK stock. This puts the company in a no-buy zone.

The Bottom Line

Given Chesapeake’s current scenario, the company would need something close to a miracle to dig them out of their debt pit. Chesapeake made some poor bets during their shale drilling heyday that pushed balance sheet numbers into the red.

While corporate bankruptcy announcements usually come as a shock to many investors, Chesapeake’s Chapter 11 filing is anything but. The company had a troubling relationship with its debt levels for many years. News of their eventual bankruptcy was a long time coming.

If you’re looking to add some energy stock to your portfolio, it would be wise to steer clear of Chesapeake stock at this time.

As of this writing, Divya Premkumar did not own any of the aforementioned stocks.


Article printed from InvestorPlace Media, https://investorplace.com/2020/06/chk-stock-bankruptcy-the-death-of-a-shale-pioneer/.

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