As investors, we love to ponder "what if" scenarios. We often think about how rich we'd be if we had bought that hot tech stock at its IPO or didn't sell a big winner too soon. However, some decisions that we didn't make turn out to be blessings in disguise.
That's certainly the case for those who failed to buy oil and gas producer Chesapeake Energy (CHKA.Q) at its IPO in 1993. That's because early investors in that energy stock would have a whole lot less money today if they had made a big bet when it debuted.
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Chesapeake Energy: From riches to rags
Shale pioneers Aubrey McClendon and Tom Ward founded Chesapeake Energy in 1989 with an initial investment of just $50,000. They took their oil and gas drilling operation public in 1993, with a valuation of $25 million.
Those who invested $10,000 at that IPO would have quickly made a fortune, as shares skyrocketed along with natural gas prices in 1996. At one point, that initial investment would have been worth more than $240,000.
Fueling that big gain was the initial success of its efforts to use horizontal drilling to tap shale-gas reservoirs in places like Oklahoma and South Texas.
However, the company's drilling machine ran into trouble as it tried to expand into the Austin Chalk formation in Louisiana. Because of that and slumping commodity prices, the company had to write down more than $200 million of assets in 1997 (which was nearly all its shareholder equity at the time). As a result, the company's stock gave up all those gains, and then some, as a $10,000 bet at the IPO would have only been worth $6,495 by the end of 1998.
Chesapeake, however, would bounce back over the next decade: It benefited from a recovery in gas prices and achieved success in new shale regions like the Barnett, Fayetteville, and Marcellus. The company grew aggressively during that time frame, issuing both stock and debt to fuel explosive production growth. That propelled the stock to new heights, and it peaked right around the time that the financial crisis rocked the global economy in mid-2008.
At one point, investors who bet $10,000 in the company at its IPO would have been sitting on nearly $490,000:
Unfortunately, the company's stock, like most others, fell like a rock during the financial crisis. While it staged a couple of recoveries along with oil and gas prices in the early part of the last decade, it plunged along with oil prices in 2014 and has never recovered. At the moment, a $10,000 bet on Chesapeake at its IPO would only be worth about $5,790:
Why Chesapeake has burned its IPO investors
Volatile oil and gas prices have played a big role in Chesapeake's poor performance over the years. Surging gas prices helped fuel the company's epic rallies in 1996 and 2008, while the subsequent plunges were one of the factors that wiped out those gains.
However, commodity price volatility alone wasn't the driving force that has incinerated the wealth of Chesapeake's investors over the years. Instead, the main culprit was overly aggressive expansion as the company has outspent its cash flow to grow throughout its history, bridging the gap by selling more stock and issuing new debt. At its peak, the company had borrowed more than $15 billion to fund the acquisition of more drillable land, as well as to drill more wells.
The company has also issued a boatload of new shares throughout its history, causing its outstanding share count to rise an eye-popping 843% since its IPO. That combination of debt and dilution have weighed significantly on the company's value in recent years, especially given the weakness in oil and gas prices.
Is there any hope for another rebound?
Chesapeake Energy currently finds itself in a tight spot as it has nearly $10 billion of debt, which is about double its targeted level. Because of that, it's seeking ways to address the situation, including potentially selling more assets.
However, with desperate times calling for desperate measures, the company will have a hard time creating value for shareholders since its main goal is to stay afloat. As such, it doesn't seem likely that the stock will enrich its investors in the near term unless it gets a big boost from a rebound in commodity prices.
