Why You Shouldn’t Invest in Chesapeake Energy After 34% Jump on Tuesday

File photo of Chesapeake Energy Corp.'s regional headquartersChesapeake Energy (CHK) rose as much as 34.4% on Tuesday on rising oil prices and the announcement that the company came to terms with creditors. Investors flocked to the stock on Tuesday, and many of them will find that the rally will be brief for the company.
Avoiding bankruptcy, the company has failed to address its core problems and has pledged nearly all of its assets to secure debt.
Creditors demanded collateral from the company, and assets were given as a result. The news that the company can continue to maintain its $4 billion credit facility isn’t enough to start buying up the company’s stock.
Oil is Fickle
Crude oil prices have dominated the market’s flow all year long. Oil prices falling caused major issues in the market and rallies are caused by oil prices rising. News that OPEC is meeting Sunday to discuss a possible production freeze has increased market sentiment and driven oil up to $42 a barrel.
The bright spot for oil is being overshadowed by Iran, which increased production by over 150,000 barrels in March, causing any oil production freezes to be counteracted as a result.
Optimism over Sunday’s planned meeting may be short-lived and is influencing Chesapeake’s stock drastically.
Federal Indictment and Credit Issues
Chesapeake Energy has had a rocky road following the news of a federal indictment and the death of Aubrey McClendon, CEO, who died in a car crash a day after reports of the indictment were splashed on news headlines across the country.
Creditors were also knocking on the company’s door in an attempt to retrieve any money owed by the company.
The company’s rebound on Tuesday was due to the renegotiation of a $4 billion line of revolving credit. Analysts expected the credit line to be reduced by as much as 20%. Providing further collateral to keep the credit line open, the company has avoided bankruptcy but has done little to address its balance sheet risk. Chesapeake will need to unload more assets to alleviate debt to satisfy creditors. The allowance to keep the credit line open should not be seen as avoiding bankruptcy just yet. The company has postponed bankruptcy, but major internal changes need to be made before it can be considered a safe investment. A major concern, which is seemingly being overlooked, is that the company had pledged 90% of its assets to keep its credit line open. Restructuring, asset sell-offs and a liquidity overhaul must follow for Chesapeake Energy to thrive in the future.

Ben Myers

Ben began his long career in international finance and investing after graduating with a degree in Finance & Accounting. Prior to founding a financial advisory firm he worked with multi-national institutions including HSBC and Bank of Ireland. After several stints as a chief analyst at forex/binary options companies Ben still remains a keen trader and featured contributor on numerous financial sites.