Chesapeake Energy’s stock suffers record plunge as reverse split confirms financial troubles

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Shares would be valued at about 8 cents each if the 1-for-200 reverse split didn’t take effect


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Shares of Chesapeake Energy Corp. suffered a record plunge to another record low Wednesday, as needing to multiply their price by 200 through a reverse stock split in order to regain compliance with listing standards only validated investor concerns.

The oil and natural-gas discovery company had announced on Monday that a 1-for-200 reverse stock split would become effective April 14 at 6 p.m. Eastern, with the stock trading on a split-adjusted basis on the New York Stock Exchange at Wednesday’s opening bell. The split means each 200 pre-split shares will automatically become 1 share, with any fractional shares paid out in cash.

A reverse stock split is often used to get the stock out of trading in the “cats and dogs” range, and is often a signal that a company is experiencing financial difficulty, said Robert Johnson, professor of finance at Creighton University’s Heider College of Business.

“A 1-for-200 reverse split simply confirms what the market already knows — the firm is on life support,” Johnson said.

Chesapeake Energy’s stock
CHK,
-9.27%

has been spiraling lower over the past couple of years as the company struggled under a heavy debt load, made worse by falling natural-gas and crude prices on supply concerns, and more recently as the COVID-19 pandemic sapped demand.

“The reverse stock split is intended to, among other things, increase the per share trading price of the company’s common shares to satisfy the $1.00 minimum bid price requirement for continued listing on the NYSE,” Chesapeake said in a statement.

Don’t miss: Chesapeake Energy’s stock target cut to zero at MKM Partners.

Also read: Chesapeake Energy’s stock breaks the buck for the first time in 20 years.

On Tuesday, the stock tumbled 18% to close at a pre-split-adjusted price of 13.12 cents. When the split went into effect, the price was multiplied by 200 and adjusted to a closing price of $26.64.

The stock followed by taking a 37.6% dive to close at $16.38 (pre-split-adjusted 8.19 cents) on Wednesday. The shares not only closed at a split-adjusted record low, they also suffered the biggest one-day selloff since the company went public in February 1993. The previous record was a 33.3% drop on Feb. 8, 2016.

“Reverse stock splits generally lead to investors bailing on the stock, because it tends to be a precursor for a company taking action that will dilute investors’ equity,” said Mike Desepoli, vice president at Heritage Financial Advisory Group. “Most investors are aware that reverse stock splits are almost always used by distressed companies, which is why the selling generally accelerates after a reverse split.”

Chesapeake Energy’s stock has plummeted 90.1% year to date, while the SPDR Energy Select Sector exchange-traded fund
XLE,
+1.12%

has lost 46.6% and the S&P 500 index
SPX,
+1.15%

has declined 13.9%.

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