The writing has been on the wall for quite some time for Chesapeake Energy (NYSE:CHK) stock. Over the last few weeks, the company underwent a 200:1 reverse stock split. It was drowning in $9 billion in debt. Then, weeks later it told the U.S. regulators there was “substantial doubt about the company’s ability to continue as a going concern.”
Shortly after, shareholders must have lost their minds, sending CHK stock up $40 in a day.
That happened for three reasons. One, OPEC+ members agreed to extend production cuts of 9.6 million barrels through the end of July 2020. There was hope a pullback in supply coupled with rising demand would help Chesapeake Energy recover.
Two, shareholders were expecting updates on how the company would cope with its debt.
Unfortunately, a recovery just wasn’t in the cards for the CHK stock. In fact, as I said on May 19, “There are far better ways to trade a future rebound in natural gas than with a stock that can’t get its own house in order. Bottom line — don’t waste your time with the stock.”
While I wish it hadn’t come to this. But it turns out I was right. Most of us were.
Chesapeake Energy Files for Bankruptcy
On Sunday night, Chesapeake Energy filed for bankruptcy.
With $7 billion in debt, and a drop in oil and gas prices, the news really came as no shock. More than likely it came to no shock to the company either.
The company just said $7 billion in debt will be wiped out through restructuring, as noted by CNBC contributors Pippa Stevens and Brian Sullivan. “The company has secured $925 million in debtor-in-possession financing in order to continue operations during the bankruptcy process.”
And, according to Doug Lawler, Chesapeake’s president and CEO:
“We are fundamentally resetting Chesapeake’s capital structure and business to address our legacy financial weaknesses and capitalize on our substantial operational strengths. By eliminating approximately $7 billion of debt and addressing the legacy contractual obligations that have hindered our performance, we are positioning Chesapeake to capitalize on our diverse operating platform and proven track record of improving capital and operating efficiencies and technical excellence. With these demonstrated strengths, and the benefit of an appropriately sized capital structure, Chesapeake will be uniquely positioned to emerge from the Chapter 11 process as a stronger and more competitive enterprise.”
CHK Stock Earnings Were a Train Wreck
In the fourth quarter of 2019. Chesapeake posted a net loss of $346 million, or 18 cents, as compared to net income of $576 million, or 57 cents a share a year earlier. Excluding nonrecurring items, the adjusted loss per share was 4 cents, which did beat forecasts for a loss of 6 cents. Revenue fell 31% to $1.93 billion, which missed estimates for $2.02 billion.
Analysts have been bearish for quite some time, too.
- Morgan Stanley said CHK was at greatest risk of default, “meaning in less than a year.”
- CFRA Paige Meyer recently noted, “Chesapeake’s net debt is approximately 105% of the value of its oil & gas reserves as of the most recent reserve report, which should be of concern to lenders.” She rated the CHK stock a strong sell with a price target of $0.
- Sameer Panjwani, director of exploration and production research at Tudor, Pickering, Holt & Co. had a price target of $0, as well. “Everyone is concerned with the debt load here. You either have to sell assets, which in this market is pretty tough to do, or you have to generate free cash flow, which they’re not doing well in this environment. They’re backed into a corner.”
What’s Next for CHK Stock
From here, it’ll be interesting to see if Chesapeake Energy can ever emerge again with a better plan to stay afloat in a volatile oil and gas market.
Ian Cooper, a contributor to InvestorPlace.com, has been analyzing stocks and options for web-based advisories since 1999. As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.