Although almost every investment sector has taken a beating due to the novel coronavirus, the volatility of the oil markets is perhaps most emblematic of the pandemic-fueled economic crisis. At one point, oil prices dropped significantly below zero. While this was a shock to the system, it most impacted already vulnerable companies like Chesapeake Energy (NYSE:CHK). Even before this present calamity, some analysts view CHK stock as an inevitable bankruptcy target.
According to three people familiar with Chesapeake’s inner dealings, that inevitability may arrive as early as Thursday. That’s when the Oklahoma City-based energy firm is apparently planning to file for bankruptcy. Currently, the insiders claim that management is in final-stage negotiations to secure a $900 million debtor-in-possession loan to support Chesapeake’s operations. Further, David French and Mike Spector of Reuters state:
The company is also in talks with creditors to “roll up” some of its existing debt and make it part of the bankruptcy loan, bringing the total debtor-in-possession financing closer to $2 billion, the sources added. The company is reeling under a mountain of debt totaling more than $9 billion.
Chesapeake is also attempting to negotiate an equity infusion from creditors to help it emerge from bankruptcy proceedings, one of the sources said.
In many ways, it’s sad to see CHK stock drop to ignominy like this. Once one of the giants of the energy sector, a series of bad decisions and unlucky events combined to leave Chesapeake debt laden and desperately searching for a solution.
Then, the coronavirus struck, sinking demand for all oil-based products. Although a recovery is underway, it seems it’s too late to save CHK stock.
Too Many Headwinds Crushed CHK Stock
At one point, Chesapeake was the second-largest natural gas producer in the U.S., behind only Exxon Mobil (NYSE:XOM). Today, Exxon is struggling to maintain momentum as it tries to build off its March recovery rally. On the other hand, CHK stock faces a very uncertain future.
And that’s really the main point about the oil market. If anybody was thinking about speculating off this possible bankruptcy play, they must realize that they’re playing against extremely unfavorable odds. Because if the majors are struggling, that doesn’t bode well for Chesapeake.
Additionally, the company has suffered one too many mistakes and setbacks. One of the biggest was an unexpected increase in natural gas supplies, causing a negative paradigm shift for CHK stock. However, management also didn’t do itself any favors when it forked over approximately $4 billion for the ill-fated WildHorse Resource Development acquisition.
To be fair, the buyout was part of Chesapeake’s pivot toward oil production. Comparatively, this was a better gig than the natural gas business. But when the coronavirus began wreaking havoc stateside, there was simply no workaround for the unprecedented calamity.
In April, Reuters reported that Chesapeake was preparing for a possible bankruptcy filing. In the following month, CHK warned that it may seek bankruptcy protection. As well, management expressed fears about their ability to continue as a going concern.
Based on two of the aforementioned insiders’ claims, Chesapeake skipped an interest payment on debt that was due on Monday. Further, another interest debt payment is over the horizon for July 1. Therefore, the signs are everywhere that this could be it for CHK stock.
Unfortunately, the entire oil segment has turned into a game of musical chairs. Although Chesapeake put up a fight, there are simply no seats remaining.
The Walls Are Closing In
Even if the rumors don’t turn out to be true, Chesapeake would only be dragging the inevitable. No matter what they do, they can’t control the fact that demand simply doesn’t exist.
For instance, utilizing data from TomTom, for the week of June 8 to June 14, Los Angeles’ automotive traffic is down 66% from the year-ago level. New York City is down 65% year-over-year. In addition, Beijing traffic is down 34% after hitting a “high” of down 29% a few weeks ago.
Then, you have to factor in the devastation to the airliners. While it’s true that June has seen an uptick in air travel, average passenger volume is down nearly 84% from June 2019 comparisons. Even if this metric improves to 60% or 70% down, it’s still a huge chunk of revenue that’s been evaporated.
As if CHK stock or any of its peers needed more bad news, coronavirus cases appear to be flaring up since early this month. Should this situation get worse, we could see another wave of selloffs. Frankly, you’re better off waiting out any oil-related company until we receive substantive recovery signals.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.