Chesapeake Will Emerge From Bankruptcy a Weakened Enterprise

Chesapeake Energy (OTCMKTS:CHKAQ) is trading at dirt-cheap prices. But any investors tempted to dip their toes are forewarned. There is no profit to be made on Chesapeake Energy stock, whether it be now or after it emerges from Chapter 11.

Here's Why Restructuring Won't Make a Difference for CHK Stock
Source: IgorGolovniov /

Why is that so, though?

Chesapeake has been around for more than 20 years. Revenues for the energy giant stood at $8.6 billion in revenue in 2019. Whiting Petroleum (NYSE:WLL), Southwestern Energy (NYSE:SWN), and Continental Resources (NYSE:CLR), none of them came remotely close.

Plus, there is a broader argument that things won’t stay this way forever. The novel coronavirus pandemic is a once-in-a-lifetime event that has left everyone scrambling. But the race is on for a vaccine, and there are signs that we could see the back of this crisis by early next year. Oil and gas demand will also recover.

These arguments are all valid. But Covid-19 is likely to have lasting impacts on the oil and gas sector, and companies that have a pristine balance sheet will have a better chance of surviving this crisis. Unfortunately, with the kind of systemic issues Chesapeake Energy stock is suffering, the energy giant is not one of those companies.

No Comeback Story for Chesapeake Energy Stock

Chesapeake Energy will emerge from bankruptcy by the end of the 2021 first quarter. Most of the $7 billion debt extinguished during the restructuring process will be swapped for shares. Debtholders, not stockholders, will drive the company’s future moving forward. That makes Chesapeake Energy stock worthless, even after the company emerges from Chapter 11.

As InvestorPlace‘s Brad Moon points out, Covid-19 may seem like a perfect storm that battered the energy sector and took down Chesapeake along with it. But in reality, the company was already staring down the barrel because of its ballooning debt. The virus merely stoked the fire of an already volatile situation.

Where Do We Go From Here?

According to the restructuring support agreement, $7 billion of the company’s debt will be wiped off, and the company will get $925 million in debtor-in-possession financing. Chesapeake will also initiate a $600 million rights offering to drum up more finance for its post-bankruptcy operations.

The agreement gives the company enough cash to keep employees, royalty holders, and vendors happy during the bankruptcy proceedings. However, the cash pile will come at a cost. Chesapeake is already negotiating its legacy contracts. We’ve already seen some of those discussions sour.

Chesapeake recently approached the U.S. bankruptcy court in Houston to relieve a $300 million natural gas contract with Energy Transfer (NYSE:ET). However, ET is strongly opposing the move, arguing that the agreement is protected from cancellation under Texas law. The case underlines that there has to be a give-and-take for the counterparty to agree on a settlement. At this point, the only thing Chesapeake can do is offer more stock, which ultimately dilutes the stake of existing stockholders.

Summing Up

Although gas prices are up after falling to historic lows in mid-March, they are still way off their pre-pandemic levels. Even though demand will return at a sluggish pace, it’s unlikely that it will ever return to peak levels. That’s because the current crisis will change the way we live our daily lives and do business.

People are traveling less, and companies are looking to make work-from-home a permanent fixture for many employees, particularly those that have a long commute. The pandemic has also led to a rethink regarding the environment. People like the clear skies that they see out their window. That’s why, despite the state of the markets, the EV sector is doing better than ever. Tesla (NASDAQ:TSLA) and Nio (NYSE:NIO) are reporting record deliveries, and that growth will not stop anytime soon.

The bottom line is that the oil and gas sector is in trouble. Even after emerging from bankruptcy, the company will have its work cut out in a world that is increasingly opposed to oil. I also expect the company to operate in a reasonably conservative approach for the foreseeable future. Debtholders aren’t as aggressive as stockholders in chasing growth.

Considering all these factors, I would stay clear of Chesapeake Energy stock at the moment. With the company set to meander along for the next few years, there are better deep value investments that warrant your attention.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Faizan Farooque is a contributing author for and numerous other financial sites. He has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.

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