In early March, as oil prices were plunging thanks to the Covid-19 pandemic, I put out a piece on InvestorPlace saying that distressed oil producer Chesapeake Energy (NYSE:CHK) was out of options and out of time and that CHK stock was ultimately doomed to collapse to zero.
Since then, oil prices have rebounded. CHK has not.
Instead, Chesapeake stock has dropped from a split-adjusted price of $60… to $12. The U.S. shale oil producer is now worth just $100 million.
Why the sustained weakness despite a rebound in oil prices?
Because the ship has already sailed for Chesapeake Energy. Even a rebound in oil prices won’t help stave off the inevitable. This company is too distressed — with too much debt and too little cash flow — to live another year. Bankruptcy is coming soon. And CHK stock will ultimately be worthless.
Here’s why.
Unfavorable Fundamentals
CHK stock is supported by highly unfavorable fundamentals.
This is a U.S. shale oil produce with too much debt and not enough cash flow to sustain an era of lower-than-normal oil prices.
Yes, the Covid-19 crisis is abating. Yes, oil prices are and will likely keep rebounding. But U.S. WTI crude prices today hover around $40 per barrel. Since 2015, $40 per barrel has essentially been the lowest oil prices have gotten at any time. They spent most of 2015, 2016, 2017, 2018 and 2019 north of $50.
Even when oil prices were that high, Chesapeake Energy was still reporting negative free cash flow. The company will continue to post negative free cash flow with oil prices in the $40s.
That’s a big problem, because as of last quarter, the company had just $82 million in cash on the balance sheet, against $9.2 billion in long-term debt alone.
In other words, the company doesn’t have many more cash burn quarters ahead of it until the cash balance disappears, and all that’s left is a huge, unpayable debt load.
When that happens, bankruptcy follows and Chesapeake stock drops to zero.
Negative News Flow
It doesn’t help CHK stock that the news flow surrounding the company has been nothing short of awful lately.
In June alone:
- Production cuts from OPEC+ have been limited to June only, putting pressure on oil prices and challenging a longer-term rebound in oil prices against a depressed demand backdrop.
- Reports broke that Chesapeake Energy is preparing to file for Chapter 11 bankruptcy, and hand over the company to its senior lenders — a move which would wipe-out shareholders.
- Chesapeake Energy skipped interest payments due June 15, something which only a company on the verge of bankruptcy would do.
So long as the news flow remains this negative, CHK stock won’t rally. It will remain depressed.
Additionally, most reports point to the reality that Chesapeake will indeed declare bankruptcy within the next few weeks. On that announcement, you will see a lot of volatility in CHK stock. You could even see a huge rally, like what you saw over at Hertz (NYSE:HTZ).
But what has happened to HTZ stock since that huge bankruptcy-related spike? It’s dropped, and given back all of those irrational gains. Zero dollars is the next stop.
Why? Because HTZ stock, like CHK stock, is worthless in the event of a bankruptcy. So, if CHK stock does get exceptionally volatile and rally to the moon over the next few weeks, don’t fall for it. It’s an irrational, speculation-driven rally that will end in pain.
Don’t play that game. Be an investor. And stay away from CHK stock, which in the long-term, is going to zero.
Bottom Line on CHK Stock
Chesapeake Energy is doomed. Out of options and out of time, the U.S. shale oil producer is on the verge of declaring bankruptcy which will wipe-out shareholders and ultimately drive CHK stock to zero.
In the meantime, you will see a lot of volatility in CHK stock. Savvy traders will be able to make money in this volatility, by buying on dips and selling on rallies. But that’s a tough game to play. And I recommend not playing it all, because at the end of the day, this stock is worthless, and any money made amid bankruptcy noise is based on pure speculation.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
