Chesapeake Energy’s ‘very low’ stock price prompts reverse split plans

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Shares of Chesapeake Energy Corp. tumbled toward another record low Wednesday, after the oil and natural gas production company said it was planning for a reverse stock split and that the commodities pricing environment has “further deteriorated” in recent weeks.

The company also reported before the market opened a fourth-quarter loss that was narrower than expected, but revenue that fell more than forecast, as production increased while average prices for oil, natural gas and natural gas liquids (NGL) production all fell.

The stock CHK, -30.43%  dove 31% to 31 cents in very active afternoon trading, putting it on track for the 14th record close in the 17 trading sessions so far in February. Trading volume ballooned to over 180 million shares, enough to make the stock the most actively traded on major U.S. exchanges.

The shares had broken the buck — fallen below $1 — in November for the first time in 20 years, after the company issued a “going concern” warning in its quarterly filing with the Securities and Exchange Commission.

Chief Executive Doug Lawler tried to assuage investors by saying on the post-earnings conference call with analysts that given improvements to margins and moves made to strengthen the balance sheet, “the previous going concern language will not be present” in the 2019 annual report, but the stock continued to sell off.

“[W]hile we have a stock price that has fallen to very low levels, we will commence actions to reverse split the number of shares with the filing of the proxy in a few weeks,” said Chief Executive Doug Lawler, according to a FactSet transcript of the conference call.

A reverse stock split has the effect of increasing the share price, as it involves converting a larger number of shares into a smaller number of shares. For example, a 1-for-10 reverse split of Chesapeake shares would reduce the shares outstanding to 195.4 million from 1.95 billion, and lift the price of each share to $3.10.

In December, Chesapeake disclosed that it received notice from the NYSE for being out of compliance with listing standards that require shares to trade above a dollar.

Also fueling investor concerns, Lawler said the “challenging” commodities pricing environment has “further deteriorated in recent weeks” as a result of the global reduction in economic activity.

Continuous crude oil futures CL00, -2.34%  fell 2.3% Wednesday toward a 13-month low, while natural gas futures NG00, -1.57%  fell 0.8% but remained in range of the four-year low hit earlier this month. Weighing on prices has been growing worries that the world-wide spread of COVID-19 will hurt the global economy, and reduce the demand for oil and gas.

“The second half of [2019] was marked by rapidly falling commodity prices, particularly for natural gas, a trend which continues today, causing a much softer commodity price outlook in 2020,” Lawler said.

And energy prices do matter for Chesapeake, as the correlation coefficient of crude oil prices and the company’s stock over the past year is +0.53, and of natural gas prices and the stock is +0.69, according to an analysis of FactSet data.

Earlier Wednesday, the company reported that it swung to a net loss of $346 million, or 18 cents a share, in the fourth quarter, from net income of $576 million, or 57 cents a share, in the same period a year ago. Excluding nonrecurring items, the adjusted loss per share was 4 cents, beating the FactSet consensus of 6 cents.

Revenue fell 31% to $1.93 billion, missing the FactSet consensus of $2.02 billion, as oil, natural gas and natural gas liquids (NGL) revenue fell 44% to $969 million.

Average daily production rose to 477,000 barrels of oil equivalent (BOE) from 464,000 BOE, while average prices sales prices for oil fell 8.7%, for natural gas declined 38% and for NGL dropped 36%.

The company burned through $545 million in cash during the fourth quarter and $2.48 billion in cash during 2019.

For 2020, the company said it is targeting “free cash flow,” as it reduces its capital expenditure budget by about 30% to $1.3 billion to $1.6 billion from the $2.25 billion spent in 2019.

CFRA analyst Paige Meyer reiterated her sell rating after the results, while cutting her stock price target to 30 cents from 50 cents. She remains concerned over Chesapeake’s cash position, as the company’s intention to fund the payment of $300 million in notes maturing in 2020 and $290 million maturing in 2021 through asset sales suggests cash flows “will not be adequate” to cover those payments.

Chesapeake’s stock has plummeted 48% over the past three months and 88% over the past 12 months. In comparison, the SPDR Energy Select Sector exchange-traded fund XLE, -3.04%  has lost 27% over the past year and the S&P 500 index SPX, -0.38% has gained 12%.

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