Chesapeake Stock: This Should Terrify Energy Investors Everywhere

Chesapeake StockU.S. natural gas producer Chesapeake Energy Corporation (NYSE:CHK) tanked on Wall Street amid rumors of debt restructuring. Investors sent CHK stock from $3.06 to $2.02, a loss of more than 33%. Reuters said Chesapeake has asked the legal firm Kirkland & Ellis to study its debt options. (Source: “Chesapeake, after shares drop by half, says no to bankruptcy,” Reuters, February 8, 2016.)

Chesapeake has debt exceeding $10.0 billion. The company assured investors it will resist going into receivership. It has promised shareholders that it will do everything it can to raise the stock price. The bottomless fall in the resources sector has forced many companies to restructure and cut their investments.

Chesapeake was once the second-largest natural gas driller in the United States, if not the entire North American continent. Yet, the company is worth eight times less than its debt load. (Source: “Chesapeake Energy shares tank 50% after natural gas firm reportedly mulls restructuring,” CBC, February 8, 2016.)

Standard & Poor’s downgraded Chesapeake’s credit rating from “B” to “CCC+.” S&P is mulling another downgrade also and said its view was “negative” on the company, while it considers another downgrade. (Source: Ibid.)

Shares lost some 50.7%, dropping to $1.51 when trading was suspended over excessive volatility. Over the past year, CHK stock has lost more than 55% of its value. In 2008, Chesapeake stock was trading at $66.00 a share. The chances of avoiding bankruptcy, much less the chances of a recovery, appear improbable at best.

Chesapeake Stock Isn’t the Only One in Trouble

Yet, Chesapeake stock is not unique. Its woes reflect the entire shale oil and gas sector’s malaise. Markets fear a rapid deterioration in the quality of oil and gas assets due to the slowdown in global growth and the ongoing crisis of raw materials. The effect is that Chesapeake stock, like all stocks perceived to represent a major risk, collapse.

Standard & Poor’s has not helped. The agency has dealt American oil and gas sector companies a major blow, placing their ratings under review. Standard & Poor’s reviewed three major American shale producers, including Continental Resources, Southwestern Energy, and Hunt Oil. It downgraded them to “junk” from investment-grade. (Source: “Standard & Poor’s cuts ratings of US oil and gas groups,” The Financial Times, February 3, 2016.)

Things are not even looking good for Exxon Mobil, the largest U.S. oil company. The oil giant can still boast its “AAA” rating, but could still endure a downgrade after Standard & Poor’s issues a verdict in about 90 days. (Source: Ibid.)

Standard & Poor’s predicts that Brent and West Texas Intermediate (WTI) oil will reach an average of $40.00 a barrel this year, $45.00 next year, and $50.00 from 2018 onwards. The agency expected many energy companies to cut capital expenditures, while improving productivity. But, warns Standard & Poor’s, this will not stem the significant deterioration expected for credit measures over the next few years. (Source: Ibid.)

John Arnold, the famous energy trader who once headed Centaurus Advisors, had a dire warning for Chesapeake. He said that Chesapeake’s “legacy costs are overwhelming.” (Source: “Chesapeake regains half of losses; says has no plans to seek bankruptcy,” CNBC, February 8, 2016.)

After the resumption of trading, Chesapeake stock continued to tumble, losing a further 1.97% to $35.78. Chesapeake had the dubious honor of suffering the biggest drop in the S&P Energy index—which itself lost 1.10%.