For one prominent energy sector pioneer, it’s anything but time to usher in the gushers. Chesapeake Energy (OTCMKTS:CHKAQ), an innovator in hydraulic fracturing (also known as fracking), has sunk as low as a stock can go since October 2018. Just how low? Try more than 99%. Chesapeake Energy stock dropped from nearly $900 per share back then to under $6 today.
No one in the energy industry could’ve possibly predicted this state of affairs back when the company led the charge in helping to convert the United States from a natural gas importer into a major exporter.
So what exactly felled the Oklahoma City-based energy giant? Most recently, Chesapeake filed for Chapter 11 bankruptcy on June 28 as it succumbed to a mountain of debt. Both external and internal factors played a role.
A Weak Sector, Wild Mismanagement
To be certain, Chesapeake isn’t alone among energy companies feeling the heat. Gas prices continue to wallow in a funk for the record books. The novel coronavirus has driven down petroleum consumption to its lowest level in decades, according to the U.S. Energy Information Administration. Between Jan. 1 and March 13, 2020, weekly supplies dropped 31% to about 14 million barrels — a level not seen since the 1980s.
During that same stretch, the energy companies in the S&P 500 stock index collectively fell by roughly 60%.
Yet alleged impropriety and wasteful spending have also dogged the company. Co-founder and former CEO Aubrey McClendon had a swashbuckling reputation for spending freely. The company’s luxurious Oklahoma City campus, complete with a community garden, deluxe dining facilities and two parking garages, cost $100 million to build.
After being ousted in 2013, McClendon was charged in 2016 with conspiring to suppress prices for oil and natural gas leases. According to the indictment, McClendon orchestrated a conspiracy in which Chesapeake and another company colluded not to bid against each other for leases in northwestern Oklahoma from late 2007 to early 2012.
A day after the indictment, McClendon, at age 56, died in a crash in Oklahoma City.
How Bad Is the Chesapeake Energy Stock Story?
Chesapeake lost $8.3 billion in the first quarter of this year alone, so yes, it has been a long way down for the nation’s former second-largest natural gas producer. Still, throwing some spare change at CHKAQ could be a smart idea.
There are recent precedents among distressed major companies that have rocketed from zero to hero in a few short years. Witness Citigroup (NYSE:C), which on March 5, 2009, saw its stock sink to an ultra-stunning low of 97 cents a share. That represented a 95% drop in value from just a year before. Today (and after a reverse stock split), Citigroup is back on its feet and now trades at about $50 per share — and that’s even after taking a 55% tumble between Feb. 20 and March 23.
You could buy 100 shares of Chesapeake for $700 today. Assuming the company can get its finances sorted out, a recovery to where the stock was just a year ago, $320 per share, would turn your investment into $32,000.
There are two ways to look at this. On the one hand, it’s well within the realm of possibility given the stock’s all-time of $13,356 per share on July 3, 2008. But on the other, the energy sector in general shows no signs of a rally. That’s right: none.
Bottom Line on Chesapeake
So any hope that Chesapeake will revisit anything close to its Wall Street glory days must ride on patience, patience, patience. Or, pun intended, you could consider it a patient, for as billionaire investor Warren Buffett has famously said, it’s a fine idea to buy the stocks of solid-but-suffering businesses “when they’re on the operating table.”
But in the case of this company, the combination of Covid-19, a slumping sector and Chapter 11 amounts to something like a triple bypass surgery. It might be asking too much to wait on a comeback.
As of this writing, Lou Carlozo did not hold a position in any of the aforementioned securities.
