Chesapeake Energy (NYSE: CHK) may be on its last legs after completing a reverse stock split in mid-April. Summer is usually a time to take vacations, but for Chesapeake it will be more doom and gloom, and investors should consider this when looking at the company’s stock.
Oil stocks have taken a beating since the COVID-19 pandemic hit markets in late February. Chesapeake has easily gotten the worst of it. What’s even worse is Chesapeake’s long-term chart and all of the analysts’ Sell ratings.
For some perspective, the stock currently trades around $13 a share and has dramatically underperformed the S&P 500 and Dow Jones industrial average. Chesapeake’s stock is down 92% year to date and down 75% in the past quarter alone. In 2014, on a split-adjusted basis, the stock price was just below $6,000. Since then shares of Chesapeake Energy have lost 99% of their value.
There doesn’t appear to be a way out for Chesapeake as the cost of debt is reaching a point where it may be too great to bear. Filing for bankruptcy may be in the cards for this oil and natural gas company.
Any seasoned investor will tell you that reverse stock splits signal some type of financial issue within a company. Generally, smaller firms will reverse split to maintain compliance with the exchanges because their stock has fallen so far.
The split ratios are often around 1-for-10 or 1-for-20 for the sake of regaining compliance. Companies choose these ratios to provide a buffer zone so if the stock falls they will not have to split again. The higher the ratio, the bigger the buffer. Considering the usual range of split ratios, Chesapeake is planning for the apocalypse.
Back in April, Chesapeake completed a 1-for-200 reverse stock split to maintain compliance with the New York Stock Exchange and avoid delisting. The share price was roughly $0.13 before the split and closed at $26.85 the day it was announced.
While shares generally rise following a regular stock split, the inverse is true for a reverse stock split. Chesapeake stock has lost about 50% of its value since the reverse split. Chesapeake shareholders must have a migraine by now.
Chesapeake recently decided to prepay executive bonuses for a grand total of $25 million to 21 company employees. For perspective, the company has a market cap of $130 million.
The company also noted that its annual incentive plan will be converted to give employees an opportunity to receive cash retention payments earned on a quarterly basis over a 12-month period, as long as they continue to work for Chesapeake.
These prepaid bonuses look like golden parachutes, but if these 21 people can save the company, $25 million may be worth it.
What’s worse is that Chesapeake has long-term debt of more than $9 billion, and even rising oil prices may not be enough to save the company. Debt is just one issue, but the COVID-19 pandemic has presented more problems.
The pandemic has caused many companies to rebuild their balance sheets. Chesapeake’s problem is that its balance sheet was never really strong to begin with and its debt burden is cringeworthy. At the end of the quarter, its cash and cash equivalents on hand totaled $82 million. Total assets came in at $7.8 billion and total liabilities were $11.7 billion.
Chesapeake has many problems to overcome to get back on track, and at this point they look insurmountable.