Chesapeake Energy (OTCMKTS:CHKAQ) stock is now 100% completely worthless and all the existing shares will be canceled. If you buy Chesapeake Energy stock now and do not sell before the shares are canceled by the company, your investment will go to zero.
That will happen the day the company emerges from Chapter 11 bankruptcy.
If you own the existing common stock shares, your investment will be zero. It is not clear when that will happen, but it will be soon.
This is exactly what the company has told shareholders in its Q2 10-Q filing. On page 12 of that filing, it shows that the Restructuring Support Agreement (RSA) has reallocated all “new” common equity in the restructured company.
For example, under the RSA, as detailed on page 12, 76% of the reorganized Company’s new common equity interests (the “New Common Stock”) will go to holders of the FLLO Term loan.
Another 12% of the New Common Stock will go to holders of second lien notes claims. That makes 88% of the total New Common Stock allocated away.
Finally, another 12% will go to holders of unsecured notes claims. Therefore, the allocations are 88% plus 12% equals 100% of the New Common Stock under the RSA. That leaves no room for existing equity holders.
Now, as if that was not clear enough, here is what a statement at the bottom of page 12 of the Q2 10-Q filing:
“Equity Holders. Each holder of an equity interest in Chesapeake, including our common and preferred stock, would have such interest canceled, released, and extinguished without any distribution.”
This makes it crystal clear. The existing share certificates and book entries held by existing shareholders will have their shares “canceled” and “extinguished.”
Therefore, this is not a program like with Whiting Petroleum Corp (NYSE:WLL), where existing equity owners ended up with value. Under their restricting agreement, existing equity owners received 3% of the new common stock.
There will be new common stock issued, all of which will go to existing debt holders. In return, the company will be released from over $7 billion in debt.
What to Do With Chesapeake Energy Stock
If you own Chesapeake Energy stock, here is what you need to do. Sell your shares. And do it immediately, since it is not clear when the company will emerge from Chapter 11 bankruptcy.
The company filed this on June 28. Typically these proceedings take three to six months but can last longer.
In fact, the company has received Debtor-in-Possession (DIP) financing of about $2 billion. This is because 100% of the new equity will be given away to existing lenders. That is what they get in return for canceling their existing debt: shares in the company and new DIP loans.
However, the DIP loans have a maturity of March 28, 2021. So, for all practical purposes, this company has to emerge from Chapter 11 well before then. It cannot operate indefinitely under the constrictive rules of Chapter 11 and DIP financing and expect to get healthy financially.
In fact, there is going to be a $600 million common stock rights offering at the time of the emergence from Chapter 11. That might be an opportune time for existing shareholders to get back in.
But, first, sell your shares and save that money to buy into the rights offering.
If you are considering buying the Chesapeake Energy stock shares now, you are nothing more than a gambler. You must be very clear in your mind that there is an extremely high probability of losing your investment.
In fact, you would be better off playing blackjack in Las Vegas (if you know basic strategy), than buying into Chesapeake Energy stock. I know a little about this as I am a card counter and typically there is only a 0.50% house edge with 2 deck blackjack and basic strategy players.
But buying Chesapeake Energy stock is more like giving the seller a 98% edge. So stay away unless you have some sort of guaranteed plan (of which I know of none).
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
