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Chesapeake Energy Stock Is Unlikely to Survive the Downturn

Chris Lau

The sudden collapse in the price of oil will hurt natural gas exploration firms the most. Chesapeake Energy (NYSE:CHK) stock is especially vulnerable. The firm has an unsustainable debt load and cannot service the interest payments with energy prices falling.

Chesapeake Energy Stock Might Make a Huge Comeback

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CHK stock tried to hold the 50 cent support line on the charts. But energy prices are far too low to give the firm much hope of survival.

Falling oil prices and the economic slowdown due to the coronavirus from China put Chesapeake Energy shareholders in jeopardy. When this started happening on March 11, the company’s stock and bond values lost much of their value.

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Chesapeake will have to restructure its debt and reverse-split CHK stock to avoid filing for bankruptcy. Bondholders will likely have to agree to a re-pricing of its debt. This group of investors is better off getting something instead of nothing.

On March 16, the company reportedly hired restructuring advisors to deal with its dire situation. With nearly $9 billion in debt, the company may consider exchanging its upcoming debt.

Chesapeake cannot buy back any of its long-term debt. This implies that long-term debt is worthless. It also suggests that CHK stock will not have any value.

Can Cost Reductions Help CHK Stock?

A reverse split may delay a delisting in the short term. But the sector’s fundamentals have weakened considerably in the last few weeks. Chesapeake managed to achieve its goal of cutting $250 million in costs last year. Plus, it refinanced its near-term maturities and reduced its debt slightly.

For 2020, it forecast a capital expenditure reduction of around 30%. On its conference call, the company said that “We are targeting flat oil volumes, declining gas production, and free cash flow to neutral business in 2020. “

Management could not have predicted oil prices falling this much. But with a $3 billion credit facility backed by its proved reserve base, banks may give the company some leniency.

Given that the Federal Reserve cut interest rates to zero, Chesapeake may negotiate sharply lower interest rates with banks on some of its debt. Still, its backers will need to bet that energy prices will recover. More importantly, this speculation requires Chesapeake Energy to generate enough cash flow to service its interest payment obligations.

Chesapeake Has Lots of Assets

The company has a very large portfolio with a very significant land position. These assets are not getting developed without receipt of any capital funding. So, if a larger firm is willing to buy them, Chesapeake Energy may use the proceeds to pay down more debt.

Even before the oil price collapse, big banks had concerns in Chesapeake Energy’s debt-EBITDA multiple. Although it has plenty of collateral to back its debt, the weak energy markets may push the company to file for bankruptcy instead.

Besides, Chesapeake has attractive assets like Powder River, Eagle Ford and Brazos Valley.

My Takeaway on CHK Stock

The majority of analysts rating CHK stock have a “sell” rating and a 25 cent price target. With the unfortunate downturn in the energy market, over-leveraged companies like Chesapeake Energy are unlikely to survive.

Investors have better oil and gas companies to choose from. Those able to operate at oil prices under $30 per barrel will weather the storm. Chesapeake Energy is not one of them.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.  As of this writing, Chris did not hold a position in any of the aforementioned securities.

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