What happened

Shares of U.S. energy company Chesapeake Energy (OTC:CHKA.Q) were cut about in half in early trading on June 9 before trading in the stock was halted. This came after material gains the day before. In fact, over the past five days the stock is up around 200% (using the last price before trading was halted). The quick downturn here is tied to a news release out of Bloomberg, but in truth it's just the reality of a bad situation finally starting to play out. 

So what

Chesapeake Energy has been struggling for some time with a heavy debt load and low energy prices. In that sense it's not dissimilar to many other companies in the oil and natural gas space, but there have been ample signs -- including a massive reverse stock split -- that Chesapeake isn't capable of muddling through the industry's rough patch this time around. 

A pair of hands stained with oil

Image source: Getty Images.

However, as oil prices started to stabilize and OPEC and Russia agreed to production cuts, investors bid Chesapeake's shares higher, along with those of other exploration and production companies, in the hope that it would avoid a trip through bankruptcy court. After the close on June 8, however, Bloomberg ran an article, citing "people with knowledge of the matter," saying that Chesapeake was, in fact, on the verge of filing for Chapter 11 bankruptcy. Such a move would, most likely, wipe out equity shareholders. Investors understandably sold the shares off.   

Now what

These are complicated times on Wall Street. Investors need to understand exactly what they are buying, and Chesapeake Energy is a prime example. There have been clear signs of the company's struggles, with many suggesting the company was destined to go belly-up before too long. Buying on the hope that this wouldn't come to pass, when there are plenty of other options in the space, was an obviously risky bet. Risks like that usually aren't worth taking.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.