Oh, how the mighty have fallen. When Chesapeake Energy’s (NYSE:CHK) Q3’s results were announced on Tuesday, you could almost hear the death knell of a former industry giant. The company whose shares once rallied over 900% towards $70 a share in a 5 year period saw its stock fall below the $1 mark and back to where it was trading in the spring of ‘99.
Deeping losses and spiraling debt were the main takeaways for investors as they ran for the exit.
A Decade of Debt
It wasn’t always like this though. Chesapeake was once the second-largest domestic producer of natural gas and led the charge on shale during the fracking boom at the turn of this decade. Being at the forefront of the industry, however, made it particularly vulnerable to any setbacks, and that’s exactly what happened.
As the adverse effects and environmental cost of drilling for shale, or fracking, became well known, public opinion turned and lawmakers started cracking down.
In response, Chesapeake tried to reinvent itself as an oil company, with activist shareholder Carl Ichan specifically picking current CEO Doug Lawler to spearhead the turnaround in 2013. Despite some early wins for Lawler, the mountains of debt didn’t go away fast enough. It wasn’t long before employees were being let go, dividends were being halted and assets were being dumped.
It looked like Ichan was starting to wipe his hands of the company when he dumped half of his 7% stake in 2016 - the same year Chesapeake’s former CEO was federally indicted for violating antitrust laws while at the helm.
In Tuesday’s report, the company reported borrowings of over $9.7 billion, up from $8.1 billion at the end of last year. The mountains of debt that have always plagued the company remain and these look to be the rock on which Chesapeake will perish as we head towards 2020.
Energy Industry Under Pressure
The company pointed fingers at continuously suppressed energy prices and highlighted a ‘going concern’ regarding their obligations if prices don’t turn around.
Overall, the stock is down 60% in 2019 while the S&P Oil & Gas index as a whole is ‘only’ down 18%. Chesapeake’s competitors are sure to be getting nervous; oil and gas companies are going bankrupt at the fastest pace since 2016 and look sure to claim another victim before the year is out.
As if to signal this, Wednesday’s close made it the biggest 2-day selloff on record as yields on Chesapeake bonds went through the roof, driving risk of default higher.
Going to Zero?
In the face of all this, some analysts have given up on the stock completely. Sameer Panjwani over at TPH has given it a price target of $0. For now, the stock is still allowed to be traded on the NYSE, but a delisting notice will be delivered if shares stay below $1 for too long.
This is a stock that knows how to sell-off. Investors who got long in the second half of 2014 would have experienced 17 red months out of the next 18. The stock literally finished positive on the month once in that time out of a year and a half’s worth of trading.
Bottom Feeder Opportunities
That’s not to say there won’t be opportunities, it has bounced hard from sustained periods of selling before. In February 2016 shares rallied 600% in 2 months and in May 2018 shares rallied almost 90% in 3 months. RSI was down around the 30 mark when both of those rallies start and that’s the stock’s RSI sits at today.
With the fundamentals pretty much shot, for now, the stock will attract a different type of trader; one who looks for momentum and breakouts.
All that being said, it’s a stock worth keeping on the watchlist for now but only worth getting involved with if you’re willing to pinch your nose while you hold it.
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