Chesapeake Energy Corporation (OTCMKTS:CHKAQ) has been a high profile victim of the perfect storm that has been 2020. Chesapeake Energy stock was hard hit by the double blow of an oil price war and the novel coronavirus pandemic, and the company was forced to declare bankruptcy.
It was subsequently delisted by the New York Stock Exchange. Now trading on the OTC Pink Market, CHK stock trades for a fraction of its January levels. Once again flirting with record lows, is now the time to snap up shares in this shale drilling pioneer?
Even though Chesapeake was in business for over 20 years, it pulled in $8.6 billion in revenue last year, and it is one of the top U.S. producers of natural gas, the answer is no. Avoid the temptation unless you really enjoy risk.
2020 Delivers Killing Blows to Chesapeake
Frankly, Chesapeake Energy stock was already ugly coming into 2020. The company was deep in dept, and as InvestorPlace’s Tom Pauli wrote last November, the only real hope for the company was “a sustained surge in energy prices.” Instead the opposite happened.
An oil price war triggered by Saudi Arabia and Russia collided with a dramatic drop in demand as a result of the coronavirus pandemic. Oil and natural gas prices cratered.
The pandemic was particularly worrying because it threatened to jumpstart changes in behavior that would accelerate the decline of fossil fuels. Oil and gas producers — especially American shale producers that required high prices for profitability — were in danger.
Chesapeake stock spiked briefly in June, shooting up 397% in just several sessions starting June 4. This rally affected many oil and gas stocks, not just Chesapeake.
For example, Whiting Petroleum (NYSE:WLL) saw its stock leap 309%. Attributed to Russia and Saudi Arabia agreeing to production cuts combined with a U.S. unemployment rate that improved slightly in May, the gains were short-lived.
Chesapeake became the largest American oil and gas producer to enter into bankruptcy proceedings in years when it filed for chapter 11 on June 28. The company reported it had lost an astounding $8.3 billion in the first quarter of the year. As part of its bankruptcy restructuring, it was working to eliminate $7 billion in debt.
On June 29 — one day after the company’s bankruptcy filing — the New York Stock Exchange delisted Chesapeake stock. Chesapeake announced it would commence trading on the OTC Pink Market under the symbol “CHKAQ.”
Bottom Line on Chesapeake Energy Stock
There really isn’t much to like about Chesapeake stock other than its cheap price. If there was much in the way of hope for the recovery of the fossil fuel industry, then the ultra-cheap price of CHKAQ might be worth rolling the dice on. But there are nothing but dark clouds on the horizon at this point.
The world is awash in natural gas. Natural gas prices have been in free fall for the past decade and hit record lows in June. Meanwhile, the pandemic means air travel is at a virtual standstill and may never fully recover.
Americans are driving less because so many of them now work from home. And they may remain working from home. Electric cars were already growing in popularity, and now we’ve reached the stage where they’re expected to outsell gas-powered cars within just two decades.
The world may have already reached the point of peak oil demand. That will continue to put pricing pressure on oil producers, and shale oil is costly to extract — so companies like Chesapeake Energy have a much higher break-even price.
With low oil and gas prices on track to continue, high production costs, and shaky financial ground, Chesapeake doesn’t inspire confidence. And Chesapeake Energy stock seems like an extremely risky bet, even if it is temptingly cheap.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.