The Ratings Game: Chesapeake Energy’s stock target cut to zero at MKM Partners

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Shares of Chesapeake Energy Corp. appeared to stabilize Friday, a pause in the selloff that sent prices briefly into the teens, although MKM Partners analyst John Gerdes suggested it was still not too late to sell.

The oil and natural gas company’s stock CHK, +3.38%  edged up nearly 4% to 26.99 cents, paring an earlier plunge of as much as 23% to an all-time intraday low of 19.99 cents. It had plummeted 41.4% over the past two sessions to Thursday’s record-low close of 26.01 cents.

Weighing on the stock this week was Chesapeake’s fourth-quarter report, in which the company missed revenue expectations, provided a downbeat outlook on commodities pricing and said it was planning a reverse stock split as share prices fell to “very low” levels.

The sharp drop in crude oil CL00, -3.80%  and natural gas NG00, -3.48%   prices, as the world-wide spread of the COVID-19 fuels fear that a resulting global economic slowdown will sap demand, certainly wasn’t helping. See Futures Movers.

And late Thursday, S&P Dow Jones Indices said it would be booting the stock from its S&P MidCap 400 index MID, -2.17%  , as the company is “no longer representative” of the mid-capitalization space.

MKM’s Gerdes cut his rating to sell from neutral, citing uncertainty over the viability of the oil and natural gas company capital structure given as energy prices continued to sell off. He slashed his stock price target to zero from $1.

“[W]e believe CHK shares should depreciate ~100% to $0 per share assuming a 17.5% equity discount rate,” Gerdes wrote in a note to clients. “At the Feb. 27, 2020 closing price of $0.26 per share, CHK’s implied equity return is nil.”

The share weakness and downgrade came despite the company removing the “going concern” warning from its latest filing of audited results with the Securities and Exchange Commission. It was that warning in early November that had knocked the stock price below a buck for the first time in 20 years.

The stock has lost 91% over the past 12 months, while the SPDR Energy Select Sector exchange-traded fund XLE, -0.24%  has slumped 31% and the S&P 500 index SPX, -2.48%  has gained 3.9%.

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