Investors have heard time and again that the trend is your friend. In the case of Chesapeake Energy (NYSE:CHK) stock, however, that couldn’t be further from the truth. For long-term CHK shareholders, the trend has been your worst enemy.
There comes a time when you just have to admit that there’s no hope for a turnaround. No one wants to be left holding the bag after a massive share-price decline. What might look like a bargain at first glance is, to be completely honest, nothing more than “dead money.”
But don’t just take my word for it. Let the data be your guidepost if you’re seriously considering taking a chance on CHK stock.
The Fall of a Giant
In retrospect, it’s stunning to consider how an energy-sector giant like Chesapeake could deteriorate so quickly and so relentlessly. If you can believe it, CHK stock has fallen 81% in 90 days, 95% in 12 months, and 99% in five years.
Analysts, as you might expect, aren’t taking a shine to Chesapeake. The share price has declined from over $62 in 2008 to a measly $0.17 in early April 2020. But for Bank of America, $0.17 is still too high of a price objective for CHK stock.
Specifically, Bank of America analysts have assigned a price target of just $0.06 on the stock. They’ve also given it a rating of “underperform.” Meanwhile, analysts at Leggate assert that Chesapeake’s best option at this point may be bankruptcy restructuring.
It gets even worse than that, actually. Kashy Harrison, an analyst at Piper Sandler, recently downgraded Chesapeake from “hold” to “sell” and reduced his price target from $1 to $0.
Heavy Debt and One Final Straw
It’s not every day you’ll hear an analyst at a highly respected firm assigning a literal zero price target on a former industry leader. But that’s a perfectly reasonable assessment of a company drowning in so much debt.
As InvestorPlace contributor and CFA it’s unlikely that Chesapeake will be able to manage its $9 billion debt load. Hake further describes the multiple factors that will compound the problem:
“Despite Chesapeake’s futures hedging for 2020, its debt maturities in 2021 will cause problems. In addition, low futures prices for 2021 will severely limit its options to survive. Moreover, there are numerous tranches of debt on CHK’s balance sheet. This will also make operating without a restructuring solution very difficult.”
We can also add low petroleum prices to the litany of Chesapeake’s problems. It could be a long time before Russia, Saudi Arabia and other oil-rich nations agree to meaningful output cuts. And, even if they agree to an output reduction, there’s no guarantee that all parties will hold up their ends of the agreement.
All of the foregoing issues have culminated in what investors should regard as the final straw for Chesapeake Energy: a shareholder vote on April 13 on a reverse stock split proposal.
The reverse-split range would fall between one-for-50 and one-for-200 shares. At this point, however, the specifics don’t really matter much. It doesn’t even matter whether a reverse split is approved at all.
Sure, a reverse stock split might get the share price above $1, temporarily. That wouldn’t improve the company fundamentals, which are horrendous. A net loss of $308 million in 2019, more than $9 billion in debt and more negative surprises than positive in earnings over the last year.
Reverse splits are often the hallmark of a desperate company. The current instance would certainly fall into that category.
The Final Word on CHK Stock
The aforementioned price target of zero might sound harsh, but it’s actually a possibility with CHK stock. And setting up a vote on a reverse stock split is just further evidence (in case you needed it) that the company is desperately trying to delay the inevitable.
Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.