Chesapeake Energy $CHK has shown much volatility in recent weeks and trading has been halted several times by the NYSE as the company prepares for a Chapter 11 Bankruptcy. As I have said before, it is always interesting to look at companies going bankrupt as sometimes we may find the best deals ever. Is this the case for Chesapeake Energy?
Chesapeake Energy stock is down 99.83% from its all time high reached in 2008 and the stock had to go through multiple reverse split over the years to remain on the NYSE.
In 2019, only about half of the revenues came from oil. The company wants to focus more on natural gas. This may seem like a good idea in theory since the demand for natural gas is increasing faster than that of oil and by Chesapeake Energy will be able to generate more revenues. The problem, however, is that it will be hard for them to turn these revenues into profits since they have a lot of debt and a lot of interest to pay on these debts.
For the year 2020, they have only about $400 million to repay in debts (including the interest). It may not seem like a lot but we need to count the capital expenditures and other contractual obligations as well. The total current liabilities of the company is $2.4 billion. That's about 27% of their revenues.
In 2021-2022, it gets even worse. They have a total of $3.9 billion in contractual obligations. Most of the cost come from the interest on the debt as the average interest rate on their debt is 8.4%. They have two options:
1. Take more debt (which will further increase the debt and interests) and hope that natural gas prices skyrocket.
2. File for bankruptcy
Even the management agrees that option 2 is the best but so far, it is still unknown when they will file for bankruptcy. They are still negotiating with creditors.
If the company files for bankruptcy, will it be a good investment? At this point, nobody can answer this question. Investing right now will be pure speculation. When the company files for bankruptcy, they will need to convert $9 billion into equity for the bondholders. The current shareholders will be wiped out. When Whiting Petroleum $WLL filed for bankruptcy, they had $4.6 billion in assets and $3.45 billion in debt. They were able to give the creditors 97% of the company. In the case of Chesapeake, this is a little harder. They have $7.8 billion in tangible assets and $9.5 billion in debt. If the company is liquidated, not all the bondholders will be paid. So, they would want to get a really good deal. It is not unlikely that the shareholders would own less than 1% of the company after restructuring.
In the short-term, the stock will remain volatile. In the long-term, anything can happen, depending on the debt restructuring plan. Full analysis of Chesapeake Energy: https://ishfaaqpeerally.teachable.com/courses/662813/lectures/16117158