Investors Wondering if Chesapeake Energy can Survive Through June

Most investors realize that black swan events in the markets create winners and losers. As a result of the 2020 pandemic, the oil market crash and the ensuing volatility, Chesapeake Energy (NYSE:CHK) has become one of the losers. Year-to-date, CHK stock is down 92%. By contrast, the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP) is down 42%.

Investors Wondering if Chesapeake Energy can Survive Through June
Source: Casimiro PT /

Although I’m overall optimistic about the potential recovery of our economy in months to come, at this point I’d not commit any new capital to Chesapeake Energy. Indeed, in a few months, the company may not even exist in its current form, rendering CHK stock potentially worthless. Here’s why.

The Pandemic and CHK Stock

Oklahoma City-based Chesapeake on Feb. 26 announced financial and operational results for the 2019 full-year and fourth quarter and released its annual guidance. The natural gas and oil producer reported a loss of 4 cents per share for the quarter versus an estimated loss of 6 cents. However, revenue of revenue of $969 million missed estimates by about 20%.

Net loss came at $324 million. In Q4 2019, it had had a net income of $605 million. Put another way, when the pandemic hit our shores and the oil crisis started in March, CHK stock was already in a fundamentally compromised situation. InvestorPlace contributor Todd Shriber has written in detail about the problems the group has been facing.

As oil and gas prices went into free fall in March, Chesapeake’s cash flow decreased. It also increasingly became difficult for the company to manage its debt.

Then on April 13, the group announced 1-for-200 reverse stock split, stating: “The reverse stock split is intended to, among other things, increase the per share trading price of the Company’s common shares to satisfy the $1.00 minimum bid price requirement for continued listing on the NYSE.”

In other words, without such a move, CHK stock would have been delisted.

Things Get Worse

A few days later management suspended dividend payments. A May 8 SEC filing showed that the group would now be paying $25 million in bonuses to 21 top executives. Investors may be interested to know that such a prepayment typically precedes bankruptcy filings.

Finally came the May 11 SEC filing which plainly expressed the difficulty the group was in. Management is now seeking seeking “a restructuring, amendment or refinancing of existing debt through a private restructuring or reorganization under Chapter 11 of the Bankruptcy Code.”

In summary, the company has already told us what is potentially next, i.e., bankruptcy.

Can CHK Stock Survive This Crisis?

The group was founded in 1989 and went public in 1992. Chesapeake Energy was number 309 on the 2019 Fortune 500 list. It was included in the S&P 500 Mid-Cap index until late February.

Put another way, the company in question is not a penny stock with hardly any assets or revenue. As a result, investors have been quite hopeful that management can navigate these choppy waters, especially as the price of oil rebounds.

However, the group has been in difficulty before. In 2016, there had been rumors of a potential bankruptcy filing, too. But it had managed to pull through those difficult days. At the time, research published by David Larcker and Brian Tayan of Stanford University highlighted poor corporate governance at the firm.

The Street is now fully expecting Chesapeake to file for bankruptcy. Furthermore, Franklin Resources (NYSE:BEN), a major institutional investor, has hired legal counsel to oversee the potential negotiations on some of Chesapeake Energy’s debt the firm holds.

Seasoned investors realize that such a bankruptcy filing could potentially make CHK stock worthless. Even if the company were to work out a deal that could enable it to avoid immediate bankruptcy, it is hard to see how CHK stock could go up in value.

Investor Takeaway

The pandemic has brought most countries not only major health worries, but also economic question marks. It is likely that in the coming months, a range of public companies may file for bankruptcy. And Chesapeake Energy will possibly be one of them. The CHK stock price has already been cratering prior to this year’s unprecedented events. And now it seems highly unlikely that it will survive this final crisis.

At this point, I’d not commit any new capital into CHK shares and instead would look to cut my losses. Even if the shares were to retain some value following a potential bankruptcy filing, there is likely to be little upside for the stock.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

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