Chesapeake (CHK) Witnesses Dramatic Share Price Fluctuations

Zacks Equity Research

Chesapeake Energy Corporation CHK recently witnessed sharp ups and downs in the stock price. On Jun 8, the stock jumped nearly 182% and closed at $69.92. Yesterday (Jun 9), the stock dramatically plunged around 66% to $23.75.

What Happened?

Following the close of market on Monday, Bloomberg reported that the leading natural gas producer was on the verge of filing for Chapter 11 bankruptcy. Trading paused for more than three hours in the morning. The trading resumed but was interrupted again and the stock ended the day above the $23 mark. The potential bankruptcy filing, per Bloomberg, could give control of the company to the creditors, wiping out equity shareholders. However, no such news has been confirmed yet.

This was not the first time that its name has been associated with the word ‘bankruptcy’. This May, the company stated that it was evaluating Chapter 11 and other options due to tough and unsustainable business environment. Even last November, the company raised doubts over its ability to continue as a going concern. Notably, 19 American hydrocarbon producers filed for bankruptcy in 2020 so far. 

What’s Deterring the Stock?

The company, which once had a market cap close to $40 billion, currently has a market cap of $232.3 million. Low commodity prices played a pivotal role in this development. Following lengthy periods of low natural gas prices, it even tried to put more emphasis on crude oil to improve the bottom line. However, the price war between Saudi Arabia and Russia earlier this year and demand destruction caused by coronavirus-induced lockdowns pushed oil prices to historical lows, upending the company’s efforts. The stock, which went through a reverse stock split to boost share price in April, had been under the scanner of investors multiple times.

All the strategic moves adopted by the company were expected to help trip the debt load from the highly-levered balance sheet. Let’s take a look at the balance sheet to get a clear view of its financial flexibility.

Levered Balance Sheet

At the end of the first-quarter 2020, Chesapeake had a cash balance of only $82 million, not sufficient to pay off its $420 million of net current maturities of long-term debt. Notably, $250 million of senior notes are due in 2020 and $294 million in 2021. Also, it had $1.9 billion outstanding borrowings under the $3-billion credit revolving facility at quarter-end.

Importantly, the company’s ability to clear a portion of net long-term debt of $9,163 million is questionable since commodity prices are still in the bearish territory. As investors are fearing the second wave of coronavirus infections, the demand outlook for fuel remains uncertain, which may hinder the possibilities of improvement in oil and gas prices. This in turn restricts the firm’s ability to gain capital from markets and reduces its credibility among shareholders.

Improvement in Horizon?

Chesapeake’s operations are expanded across leading hydrocarbon resources in the United States that comprise the Marcellus Shale in the northern Appalachian Basin and Haynesville/Bossier Shales in northwestern Louisiana. These are premier natural gas resources. As such, the Zacks Rank #2 (Buy) company is well positioned to ride on the mounting demand for cleaner energy. Importantly, the stock has gained 84.1% in the past month compared with 26% rise of the industry it belongs to.

Key Picks

Other top-ranked players in the energy space include Chaparral Energy, Inc. CHAP, CNX Resources Corporation CNX and Comstock Resources, Inc. CRK, each holding a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Chaparral Energy’s bottom line for 2020 is expected to rise 57.8% year over year.

CNX Resources beat earnings estimates thrice and met once in the last four quarters, with average positive surprise of 111.5%.

Comstock Resources’ sales for 2020 is expected to rise 33.7% year over year.

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