Chesapeake Energy Corp. (NYSE: CHK) just threw out its outlook and dramatically reduced its $8.5 billion in assets. This has caused the stock to drop significantly because CHK investors are worried about the company filing bankruptcy. Chesapeake also withdrew its 2020 forecast, published in February, which called for a 30% cut in spending while targeting free cash flow this year. Chesapeake said it recorded an $8.5 billion write-down in the first half of the year as it’s oil and natural gas production and earnings slumped along with commodity prices.
In addition, Chesapeake has hired a strategic consultant and filed for Chapter 11 bankruptcy protection in the wake of the COVID 19 lockdown, which curbed energy demand and triggered record industry losses.
CHK first warned in November that it could not survive as a viable business and cut 13% of its workforce in April. Chesapeake said in a federal filing that it had reduced oil production by more than 1.5 million barrels of oil equivalent per day by delaying or shutting down wells. Shares fell 10% to $13.18 in New York by 3.30 pm, their lowest level since March. Since April, Chesapeake Energy has also cut 13,000 jobs, or about half of its workforce, according to Bloomberg.
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What is causing Chesapeake to Declare Bankruptcy?
1) A Supply Glut and No Buyers. Chesapeake, a shale oil explorer, founded by the late Aubrey McClendon that battled for nearly a decade to become America’s largest gas producer, is struggling with a massive debt load. The company’s objective increases its production but backfired in that overwhelmed the demand, creating a glut.
2) Failure to Diversify. Chief Executive Doug Lawler’s plan to focus on crude oil production and diversify its business never took off.
3. Crushing Debt and No Way to Raise Money. (Most Important) To make matters dire, Chesapeak must repay more than half a billion dollars of debt by the end of next year, and the company is “persona non grata” to financial markets. Chesapeake’s $1.2 billion debt burden is the worst in the company’s history, dwarfing the negative results of the crash from 2014 to 2016.
“We currently have no access to capital,” the Chesapeake said in the filing. “Additionally, our customers and counterparties are experiencing uncertain economic conditions which may impact their ability to make payments to us.”
Is Chesapeake CHK Stock or Debt Notes A Buy?
We have received questions from readers asking if they should buy Cheasapeake stock (CHK), bonds, or notes. The short answer is NO. We can not recommend buying CHK at this time. This is because when companies go bankrupt, they often burn investors. Companies will often come back, but they will issue new stock, making the old shares useless. If you want something to hang on the wall, we recommend buying railroad stock. In all seriousness, this is NOT A BUY.
How Can Chesapeake CHK Investors Recover Losses?
If you bought a Chesapeake stock, bond, or note, there is a good chance that it will be worth pennies. Most likely, the company will declare bankruptcy, and it will work its way through the courts. Like most public companies, common stockholders are on the last list of people to get paid.
For investors that were sold Chesapeake stock, bonds, or notes by a financial advisor may be able to file a claim against their financial advisor to recover losses. Haselkorn & Thibaut (InvestmentFraudLawyers.com) is representing investors that were Chesapeake investments. They can be contacted at 1 888-628-5590.