For some time — and especially over the last several weeks — I’ve been warning investors not to touch Chesapeake Energy (OTCMKTS:CHKAQ). Laden with unsustainable debt combined with the oil demand destruction brought on by the novel coronavirus, the equity share formerly known as CHK stock tumbled on the news that the embattled energy company finally declared bankruptcy.
In a way, the implosion of Chesapeake is symbolic. Co-founder and former chief executive Aubrey McClendon represented a dying American breed, what the New York Times described as a “swashbuckling” personality that took huge risks and saw much early success. Indeed, McClendon’s bigger-than-life persona — not unlike that of President Trump — helped Chesapeake launch the shale gas revolution.
As the Times states, Chesapeake contributed to the U.S. becoming a gas exporter, a major geopolitical achievement and disruption. At the same time, that was also the beginning of the end for CHK stock.
Ironically, the success that Chesapeake engineered, that of extracting gas from shale rock, facilitated its failure. With a new way to materialize natural gas, energy firms did exactly that: produce the heck out of it. Quickly, the industry found itself awash with the commodity, dramatically reducing its price.
Typical of McClendon, he attempted to find ways to sell that excess, including a failed effort to mainstream compressed natural gas vehicles. But he also found himself in trouble with the law, particularly with a grand jury charging him with conspiracy to suppress prices for oil and gas leases.
McClendon proclaimed his innocence to his untimely death. But those cries fell on deaf ears as far as CHK stock was concerned. Now, both Chesapeake and our nation are at a critical crossroads.
No Easy Answer for CHK Stock
To be fair, declaring bankruptcy alone isn’t an automatic death sentence. Most notably, General Motors (NYSE:GM) went under and had to be rescued by a government bailout. Now, GM is in a much better position than it was during the Great Recession.
And in that sense, many speculators may be thinking about a contrarian position in CHK stock. After all, oil is a valuable commodity and it has to rebound sometime, right? Well, if that’s you, I’d rethink this thesis.
While many differences exist between General Motor’s bankruptcy and Chesapeake’s, the main one is that GM had options. To get out of its funk, the automaker eliminated its unprofitable brands, namely Saturn, Saab, Pontiac and Hummer, and focused on fuel-efficient cars and trucks.
Aside from reorganization and some fiscal voodoo, what does Chesapeake have left to do? Don’t get me wrong — reorgs are important. But unless you have a fundamental justification for your business, the chances of a recovery are minimal.
Unfortunately, the company can’t cut what it doesn’t have, and it can’t force people to buy what they don’t want. Thus, for CHK stock, it’s a waiting game for oil prices to recover.
But this basic thesis has become much more challenged recently. For starters, oil demand has a strong correlation with automotive traffic. Obviously, the more traffic, the higher oil prices go, all other factors being equal.
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But when you look at traffic levels of the top 10 congested cities in the U.S. — Boston, Chicago, Philadelphia, New York City, Washington, D.C., Los Angeles, San Francisco, Portland, Baltimore and Atlanta — they’re on average roughly one-third of year-ago figures.
It’s no surprise then that oil prices have been flat. And that won’t change until demand improves.
A Rough Outlook for Fossil Fuels
If the demand profile wasn’t enough to scare you off from CHK stock, perhaps the coronavirus will. Alarmingly, Dr. Deborah Birx, one of the core leaders in the White House’s pandemic response team, suggested that the U.S. underestimated the virus’ community spread.
As a result, we’re seeing a record number of new daily infections. Voluntarily or otherwise, this could result in another economic shutdown or at least a significant deceleration. If so, you could kiss oil demand goodbye for the time being.
But even without the pandemic, CHK stock and its ilk are becoming untenable.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
