The saga that is Chesapeake Energy (OTCMKTS:CHKAQ) rolls on, but the fact of the matter is this is a bankrupt entity, meaning in current form, Chesapeake Energy stock will eventually be worthless.
The Oklahoma-based company, viewed as one of the pioneers of the shale industry in North America, filed for Chapter 11 Bankruptcy protection in June and is three weeks removed from being booted from the New York Stock Exchange.
The Chapter 11 filing is somewhat miraculous because in a previous regulatory filing the company warned it may not even qualify for bankruptcy protection.
For equity investors, there simply isn’t much to see with Chesapeake Energy stock today except a dumpster fire. As part of the recovery agreement with creditors, the energy producer’s shareholders will be wiped out.
Even more damning, so will holders of preferred stock. Preferred stocks are hybrid securities with equity and fixed income traits, but when it comes defaults, companies that do so with preferreds are usually in bad shape. Chesapeake fits that bill.
If larger, better-heeled energy companies are struggling to pay their dividends, it’s not surprising that Chesapeake defaulted on its preferred obligations. At this point, there’s not much left for anyone but Chesapeake creditors and even they’ll just be getting pennies on the dollar.
Don’t Expect Miracles From Chesapeake Energy
At the end of the second quarter, Chesapeake had assets of $6.55 billion against liabilities of $10.74 billion, according to a recent filing with the Securities and Exchange Commission (SEC). Even with those assets, this is still a troubling bet for investors to consider.
It’d be one thing if Chesapeake was the lone offender in the oil and gas business. What I mean is that, believe it or not, it’d be more encouraging if the broader industry was strong and Chesapeake’s woes were company-specific.
Due to falling oil prices, a glut of gas output and likely irreversible shifts to renewable energy sources, the traditional energy and production business is imperiled, making the prospects of a Chesapeake Energy stock recovery all the more daunting.
In the first three quarters of 2020, 32 oil and gas exploration and production firms declared bankruptcy. That’s more than double the total that did so in the same period three years ago.
It is reasonable to expect that a substantial number of producers will continue to seek protection from creditors in bankruptcy even if oil prices recover over the next few months,” according to Haynes and Boone, a Texas-based law firm. “In July, nine producers filed, which, combined with the rest of the filings this year, represents a 66% increase over this time last year. It’s not quite the level of filings reached in 2016 but a disturbing trend nonetheless.”
Chesapeake has a restructuring agreement in place with creditors, which it intends to abide by, but in the aforementioned SEC filing, the company warns “there can be no assurance that the Company will be successful in completing the Restructuring or any other similar transaction on the terms set forth in the” agreement.
Making Matters Worse for Chesapeake Stock…
Underscoring the vulnerabilities facing gas producers, the viable ones based in Oklahoma reported combined second-quarter losses of $2 billion. That’s not a point in favor of a Chesapeake Energy stock rebound.
Yes, in the history of corporate America, there are examples of Lazarus acts, or companies emerging from bankruptcy to later become thriving, viable businesses. With the natural gas business imperiled and oil demand unlikely to return to 2019 levels for some time, if ever, Chesapeake, assuming it gets out of bankruptcy, isn’t likely to be one of those redemption stories.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.