Chesapeake Energy Corp. (CHK) shares gained 181% on June 8, marking a historic day for energy investors. The favorable outlook for crude oil prices resulting from the supply cuts proposed by the OPEC+ alliance was behind this dramatic rally. The resumption of business activities around the world is also a positive development as this would lead to robust growth in demand for energy sources. The party, however, might come to an abrupt end as Chesapeake might file for bankruptcy protection as early as June 15.
According to a Bloomberg report released after the market close on June 8, the company is debating whether to skip interest payments due on June 15 and invoke a grace period to negotiate better terms with its creditors. The market will react to this news today and the stock will likely open at a steep discount to the closing price on June 8.
The Management Had Already Warned Of This Outcome
A bankruptcy filing by Chesapeake would not be a surprise to many investors. In the first quarter 10Q filing, the company wrote, “There is substantial doubt about the company’s ability to continue as a going concern.” Investors seem to have brushed off this warning in the last couple of trading sessions, but things are likely to take a different turn when the market opens for trading on June 9.
A Prominent Analyst Believes The Equity Value Could Fall To Zero
On May 12, CFRA analyst Paige Meyer downgraded the stock to a sell and wrote, “We do not expect Chesapeake to be in compliance with its financial covenants beginning in Q4 2020, which would result in an act of default on the credit facility.” He went on to claim that the stock could be worth zero by the end of this year if this risk materializes. Going by the recent report of Bloomberg, the probability of this worst-case scenario is now very high.
Wall Street analysts have a median target price of $16.50 for Chesapeake shares as well, which indicates a downside of more than 76% from the current market price of around $70.
Investors who are betting on the recovery of oil should ideally focus on energy companies that have access to ample liquidity to remain solvent until the headwinds pass.
This article was originally posted on FX Empire
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