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Chesapeake Bankruptcy Now An Option

Mar. 09, 2020 2:53 PM ETChesapeake Energy Corporation (CHK)86 Comments
Bill Maurer profile picture
Bill Maurer


  • Oil prices fall as Saudi Arabia launches oil price war.
  • Hedges will help in short term, but 2021 would be ugly.
  • Reverse split ratio may need to be increased even more.

Over the last five months, I've been cautioning investors in Chesapeake Energy (NASDAQ:CHK) about the potential share price losses due to a possible reverse split. Management issued a going concern warning with its Q3 2019 results, and oil and gas prices did not do well into year's end. While I haven't been one out there calling for the company to go bankrupt to this point, recent events may now make that situation inevitable.

Last week, OPEC was unable to come to an agreement on a deal to reduce oil production levels as demand is dropping due to the impact of the coronavirus. This was mainly due to Russia being unable to come to terms with other member countries. Over the weekend, Saudi Arabia launched an all out price war in an effort to push as many barrels to the market as possible.

Saudi Aramco, the Saudi state producer, lowered its April pricing for crude sales to Asia by $4 to $6 a barrel and cut prices to the US by $7 a barrel. For the month of February, the country produced a little under 10 million barrels a day, but a current agreement on production cuts expires at the end of this month. That likely means the country will ramp up its production efforts, and it believes it can reach 12.5 million barrels a day. As a result, the energy complex was hammered when trading started Sunday evening as seen below.

(Source: cnbc.com commodities page, current prices seen here)

When we look at Chesapeake, the company has very little cash on the balance sheet but roughly $9 billion in principal debt. As the 10-K filing shows, there's about $1 billion due by the end of 2022 but then another nearly $4 billion due in the two years after that. The company was able to

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Bill Maurer profile picture
I am a market enthusiast and part-time trader. I started writing for Seeking Alpha in 2011, and it has been a tremendous opportunity and learning experience. I have been interested in the markets since elementary school, and hope to pursue a career in the investment management industry. I have been active in the markets for several years, and am primarily focused on long/short equities. I hold a Bachelor of Science Degree from Lehigh University, where I double majored in Finance and Accounting, with a minor in History. My major track focused on Investments and Financial Analysis. While at Lehigh, I was the Head Portfolio Manager of the Investment Management Group, a student group that manages three portfolios, one long/short and two long only. I have had two internships, one a summer internship at a large bank, and another helping to manage the Lehigh University Endowment for nearly a year. Disclaimer: Bill reminds investors to always do their own due diligence on any investment, and to consult their own financial adviser or representative when necessary. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.

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Comments (86)

Up 11 percent, nice rally but will it hold?
lol just stare at the company and it will tell you the answer.
linklinklink profile picture

You must not like money.
i was being sarcastic. I warned those long players in Janurary that this stock is in the same state as MHR back in 2013 before it disappeared from the market. Unfortunately no one listened.
smurf profile picture
Didn't even know they were still around.
StreamlineMidstream profile picture
Now would be a great time for Chesapeake to find low cost funding. Erase some high margin debt.
Bill Maurer profile picture

You don't get low cost funding when your stock is trading at 15 cents a share and the commodity your business is based on just plunged.
hanshenrik.nielsen profile picture
If CHK bonds are trading at 20 % value, would that not mean that if there was someone prepared to buy those and prop up CHK, then in reality debt would be reduced with 80 % ?

All of a sudden the balance sheet would not look so bad 🤔

Or is that too simplistic?

Look forward to some good comments, as I’m not on home turf here.
Too simplistic.

CH-11 is a near certainty. Thank Putin.
TopDoggie profile picture
Distressed debt guys buy the bonds at 20% and then attempt to take all the equity for themselves. The court just looks at face value of the bonds not at what they were bought at.
"Now" an option? Where have you been for the last 12-18 months?
Bill Maurer profile picture

CHK was in okay shape after the December debt swap. With oil at $50 and them mostly hedged for this year, bankruptcy was not exactly a given.
Cuip99 profile picture
I feel sorry for those that have held on to CHK. It has been a loser for a very long time, it is time it disappear from the scene. Some company will pick up the pieces at bargain prices, bankruptcy court will have a bit of work to do. Then it will be all over with.
David-McCormick profile picture
The creditors should have pulled the plug on this mess a couple years ago. No one's accountants want to "recognize" a loss. Now they may be lucky to get a dime on the dollar.
Unfortunately, CHK is still a perpetual looser.
I have followed chk for many years and the following is interesting: when oil looks good they are a gas company, when oil looks bad they are an oil company. The same thing goes for gas. When gas looks good they are an oil company, when gas looks bad they are a gas company. What is happening could actually be very good for chk. They have most of their oil hedged throughout 2020, but they have more then 70% of their revenue coming from gas. As oil companies expectedly start to cut production there will be less gas and the gas price will rise (which we are already seeing). True gas names are up double digits and everybody seems to have forgotten that chk is actually more a gas company than an oil company.
DT Now profile picture
Bond prices are nowhere near as low as they were in 2016. Check it out for yourself, yet its bond and stock prices recovered and then some.

They had very little secured debt in 2016 - which allowed them to survive until now.

This time, they've used up the gist of their secured capacity. No way to push out the unsecured maturities this time.

Game is up.
DT Now profile picture
They don’t need to do any more refinancing. They were way ahead of you on this matter. The best thing they can do right now is to sell an asset and use it to pay down the 2025 convertible debt.
who are they going to sell it to? And what would the price be. The only bids are going to be around their ankles
DT Now profile picture
This is 2016 all over again. The market needed an enema and I’m glad it’s happening sooner than later. Trump is also toast.
linklinklink profile picture
@DT Now

Don't rule Trump out. Once he gets lathered up in chicken grease he's a pretty slippery guy.
not even close. were still all time high of 2019
For markets in general, yeah, more downside possible, if not likely.

For energy sector - another story altogether.
An option?

Bonds trading at 20% of par.

CH-11 is a certainty.
DT Now profile picture
CHK is better hedged than its peers and will survive just fine. Saudi just gifted shorts with an easy out.
how much did you lose so far?
DT Now profile picture
Nothing, because I haven’t sold.
I’ve always wondered how many shares you owned. I knew you had 100,000 in 5 dollar range a few years back.

While you have not counted your paper losses, it is very evident you lost many good night sleep and you spend an awful lot of time drawing up conclusions to hold and spend that time sharing it with us. I appreciate you, DT NOW, but the deed is done. We have lost on CHK...just that the final score hasn’t been published yet. Chapter 11 is like quenching ones thirst in an arid desert for these CEO so as long as they personally didn’t cause the crisis. Lawler can either (1) take next several years to hopefully be cash flow positive, or (2) use 6-months to wipe out several billions dollars worth of debt by re-arranging the chairs and screwing the shareholders. This russia-Saudi game of chicken is too good of a crisis for Lawler to not use it to his advantage...as the saying goes: never make waste of a good crisis.  
hhpi1 profile picture
09 Mar. 2020
Isn't CHKs product mix still majority natural gas? A slow down in associated gas production from oil wells should benefit the price of natural gas. The first indication that this may be happening will be the monthly settlement price for April.
Any guesses on just how low CHK share price will go??

this is a pretty good entry point ONLY if we assume that the company do disappear within the next year or so. because oil will go back up soon
Preferreds at $6 ($100 par). Bonds at 20% of par.

There is no entry point in the common.
Damn it’s 15 cents. If your going to buy. Buy now. I wouldn’t. I feel like chesapeake will go bankrupt or another company will purchase it very soon.
long CHK!!! lol
Accelerated shale oil drilling declines and less DUC wells activated, means actual oil decline. That could boost NG prices.
chk well hedged oil for 2020 - NG not so much but price level could increase
It’s a crazy time
Bill Maurer profile picture

But when you guide to hoping for free cash flow with oil at $50 and NG at $1.85...not good when oil is at $30.
mobius2010 profile picture
Bye Bye Trash
Looks like half the oil patch may go bankrupt. Drop in oil prices won't matter much for fuel costs if half the country can't leave the house. Oil will eventually rebound and there are several stocks reaching fire sale prices. I prefer companies that have debt under control.
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