MarketWatch’s February 27 article Chesapeake Energy’s ‘very low’ stock price prompts reverse split plans highlighted the latest “fix” Chesapeake Energy (NYSE:CHK) management plans to use to stem the bleeding for CHK stock.
If you own Chesapeake stock, at what price do you feel investors might find it attractive? $10. $20. How about $50?
As the article stated, CHK stock broke the $1 barrier in November for the first time in 20 years. That was about the time co-founder and former CEO Aubrey McClendon went on a six-year buying bonanza, scooping up more than 45,000 square kilometres of land in five states, including Texas.
Andrew Nikiforuk wrote an interesting piece in March 2016 that discussed McClendon’s downfall. It was mere days after the executive died driving into a highway overpass.
“McClendon saw easy credit as one of the most important tools for cashing in on shale gas. ‘To be able to borrow money for 10 years and ride out boom-and-bust cycles was almost as important an insight as horizontal drilling,’ McClendon told Rolling Stone magazine in 2012. ‘If something didn’t work for a little bit of time, we could regroup and find something that did work,’” Nikiforuk wrote.
Borrowing billions to accomplish the land grab, it’s an outstanding illustration of why debt, even the low-interest kind, is a company killer.
Today, CEO Doug Lawler talks a good game, but trading at 25 cents, it’s hard to take the chief executive’s words for anything but PR.
The Stock Split Heard Round the World
In December, the NYSE sent Chesapeake Energy a notice of delisting because CHK stock had fallen below $1 for 30 consecutive days. The company’s solution to the predicament is to do a reverse split to put it, once more, above $1.
“[W]hile we have a stock price that has fallen to very low levels, we will commence actions to reverse split the number of shares with the filing of the proxy in a few weeks,” Lawler stated in its February 26 Q4 2020 conference call.
He went on to state that the company has significant liquidity to handle any current issues it might face due to falling commodity prices.
“Our $3 billion credit facility is supported by a very large proved reserve base which you will see is valued at $9 billion in our 2019 SEC 10-K filing and valued at approximately $7 billion to $7.5 billion under current bank methodology,” Lawler said in the conference call.
“With the improvements to our margins and the changes we made to strengthen our balance sheet and liquidity in the fourth quarter, the previous going concern language will not be present in our 2019 SEC 10-K filing.”
That is so reassuring.
Consider that Chesapeake finished 2019 with $8.9 billion in outstanding debt. Between 2020 and 2024, approximately $4.9 billion of that debt will mature. More importantly, the company’s interest payments on that debt will total $3.1 billion.
That’s not a pretty picture.
Further, consider that while it does have a revolving $3 billion credit facility that could be increased to $4 billion, $1.6 billion of it has already been drawn. In December, it shored up its financial situation by giving itself more time and borrowing-ability to ride out this current rough patch.
However, paying 11.5% on some of the new debt does not seem like an ideal solution despite the fact it moves the possibility of bankruptcy off the front burner.
That’s one fire put out. Now, it wants to put out another by doing a reverse split. At the end of December, it had 1.95 billion shares outstanding. A 40-to-1 stock split would get its share price to $10, reducing the number outstanding to 48.9 million.
CHK stock hasn’t traded at $10 since the summer of 2015. However, without liquidity, it’s going to be challenging to keep it in double digits.
The Bottom Line on CHK Stock
Back in April 2017, I said that Chesapeake stock was still a huge risk at $6. And while its Altman Z-Score has improved (it was -2.25 in April 2017; today, it’s up to 0.70) the company still is a risk to go bankrupt in the next 24 months.
My biggest question: If Chesapeake’s assets are so great, why hasn’t someone come along to scoop them up at discount prices?
I’m sorry. Chesapeake is a joke of a stock. As I said in January, if it weren’t for the 2,400 employees whose jobs were at risk, I’d recommend it be given a decent burial.
If by some miracle, Chesapeake manages to thrive, I’ll be the first to congratulate Lawler and the rest of the management team. I don’t see that happening. A reverse stock split or not.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
