Once a mighty symbol of the emerging American shale industry, Chesapeake Energy (OTCMKTS:CHKAQ) has sunk into the depths of what’s known as the bankruptcy trade. This means that speculators are buying and selling CHK stock in the hopes of turning a quick profit on a failing company.
The fact that Chesapeake stock was basically demoted from the New York Stock Exchange to the OTC markets should be a red flag for cautious investors. But then, a truly cautious investor probably wouldn’t take an interest in Chesapeake in the first place.
As a warning to anyone considering a long position in Chesapeake shares, we’ll take a look at what the company’s so-called “restructuring” really means. Unless you’re a very short-term gambler, you’ll likely find scarcely any reasons to take a stake in this bankruptcy stock.
A Closer Look at CHK Stock
If volatility is a friend to gamblers, then Chesapeake stock offers a very risk-friendly profile. The price action on July 17 is a case in point as the shares closed 10% higher on that day with no particular catalyst.
But just as Chesapeake stock can move 10% higher in a day, it can move that much lower as well. Indeed, just in the first half of July, the shares were as low as $4.25 and as high as $9.11.
It’s an unpredictable stock as the price moves don’t seem to be contained within any discernible range. So, even if the share price gets to its lowest point of the past month or two, there’s no reason to believe that it won’t just keep on falling.
Thus, Chesapeake shares are very challenging to profit from even for experienced technical traders. And on a fundamental level, as we will see, there’s hardly any justification to own the stock at all.
A Summer of Misery for CHK Stock
The period of May through July hasn’t been great for Chesapeake Energy. InvestorPlace contributor Ian Cooper did an excellent job of summarizing the flurry of miserable events:
“Over the last few weeks, the company underwent a 200:1 reverse stock split. It was drowning in $9 billion in debt. Then, weeks later it told the U.S. regulators there was ‘substantial doubt about the company’s ability to continue as a going concern.'”
Each of those events could be considered a deal-breaker for prospective Chesapeake investors. Reverse splits are often a telltale sign that a stock is falling fast and needs an artificially induced price bump just to look respectable.
After all, $9 billion in debt is nothing to sneeze at, and the words “going concern” should deter any prudent investor. However, some incautious traders haven’t been deterred. The daily trading volume on Chesapeake shares has remained shockingly robust.
Price Target: Zero
Are these traders trying to catch one of those 10% moves for a quick turnaround? The sharp price moves are undoubtedly part of this stock’s appeal. Therefore, it might be a fair candidate for “scalpers” who like to buy a stock and then sell it a very short time later for a small gain.
For anyone with a time horizon longer than a day or two, however, the outlook is highly uncertain. When Chesapeake filed for Chapter 11 protection, that should have been the last straw for risk-averse investors.
Perhaps the bulls would argue that under the terms of the restructuring, Chesapeake will secure potentially billion dollars in financing. However, these are loans that must eventually be repaid. They’re just a short-term fix, not a long-term solution.
Moreover, Chesapeake’s restructuring agreement stipulates that the company’s common stock shares will eventually be canceled and won’t have any recovery.
This means that in the long term, Chesapeake shares have no intrinsic value at all. It’s unclear whether current shareholders are aware of this. Hopefully they’ll read this and wake up to the fact that any value assigned to the stock is only temporary.
The Bottom Line
If your time frame is a few minutes or hours, then Chesapeake stock might be a reasonable day-trading vehicle. As a long-term investment, however, there are too many deal-breakers to ignore and the stock should simply be avoided.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.