Chesapeake Energy (NASDAQ:CHK) was one of 2020’s stranger penny stocks. The combination of the pandemic and plunging oil prices put the final nail in the coffin for Chesapeake Energy stock.
With the company facing nearly $10 billion in debt, Chesapeake simply couldn’t hang on any longer. When it was finally delisted, CHK stock went to trade as CHKAQ on the pink sheets.
Despite that seemingly being the end of the line for Chesapeake, traders continued to buy up tons of CHKAQ stock. It seemed folks didn’t realize that it truly was game over for the stock.
While Chesapeake continues to exist as an operating business (more on that below) CHKAQ stock has not. The company recently wrapped up its bankruptcy reorganization and left the old CHKAQ stock entirely without value. It’s canceled and worth $0 now.
Chesapeake: Old Bonds Turn Into New Stock
In the American bankruptcy system, creditors have the right to full recovery of their assets. That comes ahead of the common stockholders.
In the case of Chesapeake, the company was saddled with more than $9 billion in debt. The bankruptcy court found that Chesapeake’s assets were worth around $5 billion. Clearly, its debt load greatly exceeded its operating assets, and thus there was nothing left over for people who owned the old CHKAQ stock.
Now, though, Chesapeake exits bankruptcy with just $1.4 billion in debt, the bankruptcy process has discharged all of the rest. Thus, its assets cover its liabilities on a three-to-one ratio. This puts Chesapeake in a strong position to benefit as the economy starts to recover and natural gas demand rises.
Many of the old bondholders have turned their bonds into the new CHK stock. That’s what you see trading on the Nasdaq now. However, the old CHKAQ stock is gone. That’s what the whole bankruptcy process is about, and why it was so perplexing that traders were fascinated with Chesapeake and other such bankruptcy shares last year.
Prospects Going Forward
Chesapeake did admittedly sell off many of its best assets during its long struggle to avoid bankruptcy. It also had to lay off a large number of employees, including key geologists and scientists.
This might reduce Chesapeake’s ability to find new drilling opportunities that it would have seized in the past. On the other hand, Chesapeake arguably ran into trouble precisely because it was too eager to expand under past management.
Chesapeake’s current CEO Doug Lawler agrees. He says that the previous era of shale became noteworthy for all the wrong reasons. Going forward, Lawler has committed to putting Chesapeake on a far more conservative and sustainable path:
“We’re going to offer a very competitive, free-cash flow generation machine that has a disciplined approach to our capital-reinvestment rate, that has a very strong, disciplined approach to our cash cost – focused not just on profitability but also sustainability,” Lawler said.
It’s particularly encouraging to see Lawler put the focus on free cash flow generation going forward. This should be a far more promising direction for shareholders than the old focus simply on increasing top-line production and revenues.
Chesapeake Energy Stock Verdict
If you owned the old Chesapeake CHKAQ stock, the story is now over. It’s a tough lesson on the cold reality of the American bankruptcy system. In general, investors tend to steer clear of stocks going through bankruptcy, and this is a good example of why.
As for the new shares of Chesapeake, they could certainly end up being a success. For years, my commentary here has honed in on Chesapeake’s excessive debt load. Now that’s solved.
Chesapeake has more than $3.5 billion in positive net worth now that it eliminated the vast majority of its debt in bankruptcy. That, plus a more conservative and careful management team, gives Chesapeake a real shot at success going forward.
There’s still a bunch of macroeconomic questions around the state of the economy and how fast the demand for oil and natural gas will return. However, many other natural gas stocks have been trending higher in recent weeks, and CHK stock could tag along with them.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.