Chesapeake Energy Corporation CHK recently performed a reverse stock split to boost share price but failed to arrest the decline in the stock, as it tumbled 37.6% yesterday.
Let’s delve deeper to analyze this move, and get an unbiased view of the company’s weaknesses as well as strengths.
Reverse Stock Split
The stock traded on NYSE below the $1 per share level for a significant period time, which prompted the board of directors to approve a 1-for-200 reverse stock split. The move was expected to boost share price and comply with NYSE listing requirements, along with reduce the number of outstanding shares from 1.957 billion in Apr 10 to 9.784 million. While 200 pre-split shares were converted into one share, the fractional shares of investors were paid in cash. Following the reverse split action, the stock price multiplied 200 times and was adjusted to a closing price of $26.00 on Tuesday.
The reverse stock split only validated investors’ concerns and they continued abandoning the stock, resulting in nearly 38% decline of the share price to $16.38. This is the biggest one-day selloff witnessed by Chesapeake since February 1993, when it went public. The company is grappling with high debt burden and unfavorable business scenario.
Balance Sheet Weakness
The company’s balance sheet is significantly more leveraged than most of the companies belonging to the industry. Notably, the firm’s debt-to-capitalization ratio stands at 67.3%, much higher than the industry’s 41.7%. As of Dec 31, 2019, Chesapeake had a cash balance of only $6 million and net long-term debt was $9,073 million. This restricts its ability to gain capital from markets and reduces its credibility among shareholders.
Moreover, the company has more than $300 million of debt maturing this year. Even though it had planned to divest $300-$500 million non-core assets to pay off the debt, the current weak oil and gas environment has slashed the asset values. This has made it tough for the company to reach the divestment target.
Unfavorable Business Scenario
The current market uncertainty, fuelled by low commodity prices and a massive supply glut, is affecting energy companies, especially those with huge upstream activities. Through 2019, Chesapeake produced 176.6 million oil equivalent volumes — comprising more than 70% natural gas. As oil and gas prices are expected to be in the bearish territory for now, owing to the coronavirus pandemic that has destroyed significant energy demand, Chesapeake’s business will remain in the tight corner.
Despite these difficulties, the company’s strengths should be taken into account by investors.
Chesapeake’s operations are spread across leading oil and gas resources in the United States that comprise Powder River Basin, Mid-Continent areas, along with shale plays like Eagle Ford, Marcellus and Haynesville. Compared with most of its peers, Chesapeake has the longest laterals in the Eagle Ford. Also, drilling and completion cost per lateral foot in the Eagle Ford is the lowest for the company among most other players operating in the prolific play. As such, once the lockdowns are withdrawn and the economy comes back on track, the company’s operations are likely to boost profit levels.
Year-to-Date Price Performance
Chesapeake has lost 90.1% year to date compared with the 55.5% decline of the industry it belongs to.
Zacks Rank & Stocks to Consider
Currently, Chesapeake has a Zacks Rank #3 (Hold). Some better-ranked players in the energy space are Comstock Resources, Inc. CRK, Murphy USA Inc. MUSA and Noble Corporation NE, each having a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Comstock Resources’ 2020 sales are expected to rise more than 33% year over year.
Murphy USA’s 2020 earnings per share are expected to rise 14.7% year over year.
Noble Corp.’s 2020 earnings per share are expected to gain nearly 12% year over year.
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Chesapeake Energy Corporation (CHK) : Free Stock Analysis Report
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