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Chesapeake (CHK) Files for Bankruptcy Amid Low Gas Prices

Zacks Equity Research

Chesapeake Energy Corporation CHK recently filed for Chapter 11 protection in the U.S. Bankruptcy Court in the Southern District of Texas. The company is one of the biggest shale natural gas producers responsible for the famous shale revolution.

The move is expected to reset Chesapeake’s capital structure and business. At the end of first-quarter 2020, it had a cash balance of only $82 million, not sufficient to pay off $420 million of net current maturities of long-term debt. Importantly, $250 million of senior notes were due in 2020 and $294 million in 2021. Moreover, the company’s ability to pay long-term debt of more than $9 billion is questionable since low gas prices are affecting the bottom line. Chesapeake, which once reached a market valuation of more than $37 billion, closed at $115.9 million last Friday.

The stock, which went through a reverse stock split to boost share price in April, has been under the scanner of investors for the last few months. The recent restructuring plan is expected to enable the company to reduce $7 billion of debt. As such, the decision was supported by several creditors. It secured $925 million in debtor-in-possession financing to fund operations during the reorganization process.

The Zacks Rank #2 (Buy) company is expected to emerge from the Chapter 11 process on the back of its diverse operating platform, improving capital and operating efficiencies, along with well-judged capital structure. Moreover, U.S. Energy Information Administration expects the share of electricity generation from natural gas-powered plants to increase to 41% this year from 37% in 2019. This will increase the demand for natural gas in the coming days.

Notably, more than 200 companies have filed for bankruptcy protection in the last five years. The current energy market volatility aggravated by coronavirus-induced lockdowns can further worsen the situation. As such, many more upstream companies with high debt exposure will succumb to energy demand destruction, and low oil and gas prices.

Price Performance

The stock has depreciated 8.9% in the past month compared with 4.8% decline of the industry it belongs to.

Stocks to Consider

Other top-ranked players in the energy space include Chaparral Energy, Inc. CHAP, CNX Resources Corporation CNX and Bonanza Creek Energy, Inc. BCEI, each holding a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Chaparral Energy’s bottom line for 2020 is expected to rise 57.8% year over year.

CNX Resources beat earnings estimates thrice and met once in the last four quarters, with average positive surprise of 111.5%.

Bonanza Creek beat earnings estimates in the last four quarters, with average positive surprise of 8.7%.

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