What happened?
Shares of Chesapeake Energy (CHKA.Q) are down 19.9% at 1:05 p.m. EDT on April 27, following a note from Moody's Corporation after market close on April 24, downgrading the troubled oil producer's senior unsecured debt. Moody's lowered the rating on Chesapeake's senior unsecured notes to "C," citing the company's "untenable capital structure" and the ongoing oil crash as increasing the likelihood that Chesapeake would default on its debt.
So what
Moody's, one of the major ratings agencies, gives a "C" rating to debt that's on the cusp of default, with the next step down to "D" reserved for bonds that are already in default. Today's big sell-off looks to be a wake-up call for many people who've bought Chesapeake stock recently on the expectations that the company could somehow avoid bankruptcy.
Image source: Getty Images.
In addition to the Moody's downgrade, the news on the oil storage front remains dire. Over the weekend, South Korea -- one of Asia's largest commercial oil storage locations -- ran out of extra storage. Here in the U.S., the storage situation is only slightly better, but we are still likely only a couple weeks away from running out of commercial storage (and some areas are already full up).
Now what
The future for Chesapeake is stark. The company was counting on asset sales to help it pay off debt maturities in 2020, and the company was simply not prepared to deal with the epic recession that the COVID-19 pandemic has caused. A lot will change in the oil patch from this point on, including lenders making it much harder to access capital, and the massive glut of oil in storage will push the benefit of the eventual recovery in oil demand even farther into the future.
Moody's downgrade is more evidence that Chesapeake is unlikely to survive the downturn without having to restructure its debt, and the most likely outcome is bankruptcy. Chesapeake the company could survive the downturn via bankruptcy, but a bankruptcy would almost certainly wipe out current shareholders. There's little reason to risk any capital on this troubled oil producer right now.
