What: Shares of U.S. natural gas and oil producer Chesapeake Energy Corporation (CHKA.Q) were down by more than half a one point on Feb. 8 after word got out that the company was working with the law firm Kirkland & Ellis, LLP. As of 11:40 a.m. ET, shares are down by almost 28% in very heavy trading. 

So what: One of the things Kirkland & Ellis is known for is working with companies to restructure, and the immediate fear driving shares of Chesapeake down following this announcement was that the company was nearing bankruptcy -- potentially even working on a so-called "pre-negotiated" bankruptcy, where a company and its creditors reach terms before it actually files for bankruptcy protection. Trading of Chesapeake shares has been halted several times already today. 

Chesapeake released a statement this morning after the market freaked out, stating, "Kirkland & Ellis LLP has served as one of Chesapeake's counsel since 2010 and continues to advise the company as it seeks to further strengthen its balance sheet following its recent debt exchange. Chesapeake currently has no plans to pursue bankruptcy and is aggressively seeking to maximize value for all shareholders."

In other words, the market could be overreacting to the whole thing. 

Now what: That doesn't mean that Chesapeake isn't in trouble. Frankly, the company is in a tight spot, with low natural gas and oil prices pressuring its ability to generate enough operating cash flows to both support operations and to cover its significant debt expenses while also significantly weakening the market for selling off assets to pay down its debt. 

However, investor Carl Icahn, remains a significant shareholder, and essentially controls a seat on the board, and his influence on the company -- and the fact that his investment in common stock would be wiped out just the same as us little guys -- may slightly reduce the risk of bankruptcy.

At the same time, Chesapeake management is working hard to strike deals to renegotiate its debt, rolling maturities further out and reducing debt costs where it can, while at the same time cutting operating and administrative costs as much as possible and negotiating with suppliers and servicers to reduce those costs as well.

The bottom line? Chesapeake, like many U.S. oil and gas producers, is heavily leveraged with debt, and is in a big way paying for the "sins of its father," having never been able to get out from under the debt that was largely created when former CEO and co-founder Aubrey McClendon was aggressively taking on debt to expand production. 

Put it all together and it's hard to call this drop a buying opportunity. As a current Chesapeake shareholder, I'm firmly convinced that at this point it would just be putting good money after bad. Better to sit on the sidelines right now and let things play out a bit before taking on the risk that management can salvage the business.