Please ensure Javascript is enabled for purposes of website accessibility

Why Chesapeake Energy Stock Crashed 45% on June 9

By Reuben Gregg Brewer – Jun 9, 2020 at 11:34AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Overly excited investors got hit with a cold dose of reality about Chesapeake Energy's future.

What happened

Shares of U.S. energy company Chesapeake Energy (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.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chesapeake Energy Corporation Stock Quote
Chesapeake Energy Corporation

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.