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Why Chesapeake Energy Stock Rallied 5% Today

By Reuben Gregg Brewer – Updated Jun 23, 2020 at 10:20AM

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Shares of the troubled oil company continue to bounce around with news and oil prices.

What happened

Shares of exploration and production company Chesapeake Energy (CHKA.Q) rose 5% in early trading on Tuesday. Although the stock quickly gave back around half of that gain, today's price move is pretty tame by recent standards. Over the past month or so, the oil and gas driller has seen its stock spike higher by more than 300% and just as quickly lose all of that gain to end that span with a loss of nearly 10%. This is not a stock that most investors should be looking at right now.

So what

The big news driving Chesapeake's stock today was likely a jump in the price of oil. Like Chesapeake, black gold didn't hold its gains, which were driven by positive news on the trade front. So the up and down in Chesapeake's stock in early Wall Street trading makes complete sense.  

A man sitting on a step holding his head with stock tickers behind him and a falling stock price chart

Image source: Getty Images

What doesn't make much sense is the enthusiasm that investors seem to have for investing in Chesapeake at all. There are persistent rumors that it is on the verge of declaring bankruptcy. Although those whispers have yet to prove true, what is very clear is that Chesapeake is in a precarious financial position today. Its debt load is considerable, and current energy prices may not be high enough to support the financial weight the company is carrying on its balance sheet.

In fact, it recently chose to skip an interest payment, putting it in default on a loan. Even if the company manages to come to terms with its lenders, it's clear that things are pretty bad.  

Now what

Most investors should steer clear of Chesapeake Energy today. At best, it's a turnaround stock still trying to find a solution to its financial problems. The risks are simply too high given its precarious situation and the very material likelihood of bankruptcy, which normally wipes out stock investors.

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.

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