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Why Chesapeake Energy Stock Fell 10% on June 29

By Reuben Gregg Brewer - Jun 29, 2020 at 10:38AM

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The company finally pulled the trigger on a major step in its effort to mend its balance sheet. Shareholders shouldn't be happy.

What happened

Shares of U.S. exploration and production company Chesapeake Energy (CHKA.Q) fell about 10% out of the gate on June 29. The stock has been on a volatile ride over the past month, driven largely by big-picture news and wild emotional shifts among investors. This time, however, the company-specific news is big. In fact, it's a bit surprising that Chesapeake didn't fall further.

So what

Chesapeake, an energy company that helped usher in the U.S. fracking revolution, has been struggling under the weight of a debt-laden balance sheet for some time. It has finally succumbed to that pressure and declared bankruptcy on Sunday, June 28. This isn't a shock: Rumors have been swirling about just such an outcome for months. What's been more surprising is the active trading in the shares while most industry watchers have pretty much been waiting for the company to announce it was seeking court protections.  

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

Image source: Getty Images.

At this point, few if any investors should be buying Chesapeake stock. In most bankruptcy situations, shareholders are wiped out because they are at the bottom of the creditor pile. Buying the company's shares is purely speculation today -- a fact that's actually been true for some time now. 

Now what

Chesapeake Energy will likely continue to operate through the restructuring process. The bad news is that Chesapeake investors are likely to walk away with nothing. But there is a bigger silver lining: The bankruptcy should help the global energy market move closer to a solution to the supply/demand imbalance that has kept energy prices at painfully low levels. It's just one small step along the way, of course, but every little bit helps. 

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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