Chesapeake Energy Corporation (NYSE: CHK) stock has been beaten up for the last few years, and it only seems to be getting worse. With bankruptcy in the cards and a mountain of debt, survival for the oil and gas company is doubtful.
The COVID-19 pandemic crashed the market and no industry was spared. Oil stocks were hit especially hard — with oil prices turning negative in April — and Chesapeake Energy may have gotten the worst of it all.
Looking at the chart, Chesapeake Energy stock now trades near $14 a piece and has greatly under-performed the S&P 500 and Dow Jones industrial average.
Chesapeake Energy currently has a market cap of $137 million, which might not appear to make sense as the company has $7.8 billion in assets on its balance sheet. At the same time, however, the company has $11.7 billion in liabilities.
In a recent filing with the Securities and Exchange Commission, the Oklahoma City-based energy company noted that bankruptcy was on the table, citing low commodity prices as a large contributing factor.
Chesapeake noted in this filing that it expects to violate its financial covenants coming up over the next twelve months. The company pointed to depressed oil and natural gas prices. According to the filing, “If the current depressed prices persist, combined with the scheduled reductions in the leverage ratio covenant and an expected significant reduction in our borrowing base in our scheduled determination, then our liquidity and our ability to comply with our financial covenants during the next 12 months will be adversely affected.”
These financial covenants require Chesapeake to be within a 4-to-1 ratio of debt to consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) by October. In this case, bankruptcy could be useful in restructuring the debt and staying alive just a little longer.
Even with restructuring from bankruptcy, success is not assured, as the company noted in the filing: “However, there can be no assurances that the company will be able to successfully restructure its indebtedness, improve its financial position or complete any strategic transactions.”
Perhaps the most damning comment in the filing was that “there is substantial doubt about the company’s ability to continue as a going concern.” Even with bankruptcy, restructuring, or strategic transactions, there is a very likely chance of failure or insolvency.
Since most of Chesapeake’s problems are related to the price of oil, the recent recovery may provide a ray of hope for the company and for its investors.
Oil started the year close to $60 per barrel. While prices have bounced off the lows in April there is still a long way to go. The price of $40 per barrel is considered the level at which domestic producers break even — anything after that is profitable. Oil currently trades just over $37 per barrel.
However, it’s likely that oil and gas prices will continue to recover as countries across the world reopen their economies and life returns to a “new normal.” The engines of these economies run on oil. COVID-19 was an acute episode that put business on hold, leading to a glut in supply. Now with things reopening and many stock prices moving higher, Chesapeake may have a shot at survival.
If oil prices do continue to recover, Cheseapeake will undoubtedly benefit and might be seen by some as a stock to buy, but it may be too little too late. The biggest beneficiaries will be companies like Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), rather than smaller oil exploration and production companies like Chesapeake. At this point, it’s still focused on survival.