Shares of Chesapeake Energy (NYSE:CHK) shed 92% of its value year to date with virtually no end to its misery in sight. With its immense debt load, beaten down energy prices, and tumbling stock price, Chesapeake and CHK stock is nearing its end.
Credit rating agencies such as S&P Global deemed the company’s bankruptcy filing a “virtual certainty” in the next few months. The company has roughly six months of liquidity left and is likely to file before the end of the summer.
That isn’t hard to imagine as it would need to meet its massive debt obligations worth $208 million in August and pay off interest payments worth $135 million in June.
Additionally, its last-ditch efforts to salvage its share price with a 1-for-200 reverse split led to further erosion in CHK stock. Therefore, the situation is well beyond the company’s control, and with the potential restructuring insight, it will probably wipe out of its entire value.
With that being said, let’s dive a little deeper into Chesapeake’s sob story.
Red Flags for CHK Stock
Chesapeake’s management sent out several red flags, which made it clear that things were getting out of hand. Perhaps the first thing was it did not hold a first-quarter earnings conference call this year. I cannot think of any company that did not hold an earnings conference call and not go on to declare bankruptcy afterward.
However, given the extreme volatility in the oil and gas sector, we could give CHK the benefit of the doubt, but issuing a going concern statement is something else entirely. Management stated it expected its borrowing base to shrink due to the company’s “distressed financial position.” Management said it did not expect to remain in compliance if the energy markets do not correct themselves.
CHK already borrowed 63% of its $3 billion credit facility. Therefore, it is well in the danger zone with any cut of less than $1 billion. If it can’t make any amendments to its financial instruments, it will be curtains for the company.
Capital expenditures are the lifeblood of the business, and roughly $2 billion is needed each year to maintain its flat production. However, the discrepancy between its operational cash flows and capital expenditure requirements has prompted the company to reduce its budget by $1 billion in 2020. This represents a massive drop in production, which will further add to its woes.
Considerable Exposure to Oil Prices
Gas prices are up more than 20% from April lows and are expected to rise throughout the rest of the year. With oil producers scaling back on production, associated natural gas production is also taking a hit, which has pushed prices higher.
Thus natural gas stocks are up considerably; for example, Antero Resources (NYSE:AR) stock has more than doubled in the past three months. Some investors felt that Chesapeake would follow suit, and its stock price would rise in line with the other natural gas producers. However, this has hardly been the case
A large part of this is because the company’s exposure to oil is much more significant than the major natural gas producers. For example, the 2019 oil revenues for the company constituted 60% of the total revenues generated from oil, natural gas and NGL. Therefore, tumbling oil prices have crippled the company’s top and bottom line.
Furthermore, the company’s debt load is considerably higher than the other natural gas producers. CHK is second among the top natural gas producers in terms of its debt-equity ratio. Therefore, investor expectations about Chesapeake are primarily based on false assumptions.
Heading Towards the End
Chesapeake recently announced that it wouldn’t be able to meet its financial obligations for the rest of the year, which is why it is headed towards bankruptcy. If the company is unable to restructure its massive debts through a Chapter 11 reorganization, it would have no choice but to wrap things up for good.
After posting a massive net loss of $8.3 billion in its most recent quarter, most analysts feel that the end is well within sight.
According to Refinitiv, CHK stock will drop a further 62% of its current price. In contrast, CFRA analyst Paige Meyer cut her price target for CHK stock to zero. She said that if the company defaults on its covenants beginning in the fourth quarter, it will result in an “act of default on the credit facility.”
Bottom Line on CHK stock
Chesapeake is staring at its end. It has already announced that its bankruptcy is on the table and despite the involvement of short sellers, Chesapeake stock will likely end up at zero. Credit rating firms all agree that the stock will be worthless in the upcoming months.
Therefore, avoid CHK stock at all costs.
As of this writing, Muslim Farooque did not hold a position in any of the aforementioned securities.