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Here’s Why Chesapeake Energy Corporation’s Stock Plunged 18.7% in February

By Matthew DiLallo – Mar 4, 2016 at 8:00PM

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The natural gas driller went on a wild ride last month.

What: February was another tough month for Chesapeake Energy (CHKA.Q) investors after the stock ended the month down 18.7%. However, it could have been much worse, with the stock down as much as 50% before recovering thanks to better-than-expected news on asset sales.

CHK Chart

CHK data by YCharts

So what: Chesapeake Energy's stock was cut in half after a report surfaced that it had hired attorneys for restructuring, which the market thought was because it was going to file for bankruptcy. The company, however, almost immediately put out a statement saying that it has worked with those advisors since 2010 to strengthen its balance sheet and has "no plans to pursue bankruptcy." Instead, its goal is to "maximize value for all shareholders."

Despite what the company said, the market remained wary of its ability to avoid bankruptcy until it reported its fourth-quarter results. In that report the company noted that it sold $700 million in assets, which was well above its forecast for $200 million to $300 million in asset sales. Further, Chesapeake said it was planning to sell another $500 million to $1 billion in assets in 2016 to bolster its balance sheet. That helped ease concerns that the company would be unable to meet upcoming debt obligations, including a $500 bond maturity in March, which it intends to repay in full.

On top of that, the company outlined a much more conservative capital spending plan for 2016, which will see it cut its budget by 57% from what it spent last year. That will result in its production declining by as much as 5%, which is also seen as a positive given that the market remains oversupplied with oil and gas.

Now what: After initially freaking out that Chesapeake Energy was about to declare bankruptcy, the market slowly began to realize that it's not going to happen, at least any time soon. That's after the company bought itself more time after selling a boatload of assets, with expectations for more sales to be made in 2016. Further, it finally put an end to its wild overspending to grow production, which will not only prevent it from burning through more cash, but should help the market get back into balance. It's a ray of hope in the midst of a very though stretch for the company.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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