An April 15, 1-for-200 reverse split in Chesapeake Energy (NYSE:CHK) averted a delisting on the New York Stock Exchange. But CHK stock continues to face tremendous selling pressure. Even the over 80% price increase in oil prices failed to give the stock a lift.
Unless natural gas demand improves, Chesapeake Energy is high-risk speculation. Why should investors even bother with considering it?
Bankruptcy Risks With CHK Stock
Chesapeake Energy is in an ongoing risk of defaulting on its financial covenants. S&P Global Ratings said that the company has a “virtual certainty” of a bankruptcy filing or distressed capital restructuring. It assigned a credit rating of CC, down from CCC. The company has $135 million in interest payments due this July. Another $208 million in debt matures in August.
The company reported cash of just $82 million on hand, but its long-term liabilities consisted of $9.16 billion in debt. For the three months ended March 31, Chesapeake Energy posted revenue of $2.54 billion. Expenses totaled $10.77 billion. In the quarter, it lost $8.32 billion, or a disturbing loss of $852.97 a share.
If Chesapeake Energy files for bankruptcy, shareholders will lose all the equity value. Bondholders will have the priority in getting back any money. So, the stock would fall in the low single digits. As investors who held the stock all this time sell to book the losses, CHK stock will fall further.
In the filing, Chesapeake noted the going concern of “fluctuations in oil and natural gas prices have a material impact on our financial position, results of operations, cash flows and quantities of oil, natural gas and NGL reserves that may be economically produced.”
The stay-at-home order due to the novel coronavirus added to the increasing volatility in energy markets. This depressed natural gas prices and will likely hurt the market for the next few months. The company will probably run out of time in paying its debt and interest on debt obligations in the near-term.
Unless Chesapeake negotiates a deferral with creditors, bondholders and shareholders will both lose if the company files for bankruptcy.
Oddly enough, eight out of nine analysts ranking CHK stock have a “sell” rating. Yet the price target is $16.50 (per tipranks). Conversely, Stock Rover thinks the stock is worth $36.19 despite the following scores against its peers:
Overall Ratings Score: 12
Growth Ratings Score: 35
Valuation Ratings Score: 48
Data courtesy of Stock Rover
The company scores a relatively average value score of 48. But unless management dispels ongoing worries of its bankruptcy risks, value investors will not speculate on this stock.
Investors are better off buying companies with a bigger market capitalization. Marathon Oil (NYSE:MRO) has more investors behind it and has a better chance of survival. Occidental Petroleum (NYSE:OXY) is not an ideal, risk-free stock. It has too much debt after the Anadarko acquisition, but it counts on Berkshire Hathaway (NYSE:BRK-B) as one of its investors.
All of these related energy ideas require improving market conditions and a rebound in the economy. Still, these firms may continue operating at a loss longer than Chesapeake Energy.
Chances are slim but not impossible that natural gas prices somehow rebound. This would give Chesapeake some hope in generating better cash flow. In the debt renegotiation front, it may find a way to find support from creditors. These investors are better off if Chesapeake continues to operate and pays off its debt later down the road.
If debtholders agree to a delay in payments and wait out an energy rebound, everyone benefits.
As of this writing, the author did not hold a position in any of the aforementioned securities.