<p>If there is any doubt that the coronavirus from China has escalated into a pandemic, the last Monday has removed all ambiguity. It has been more than a decade since we last saw such a sharp decline in the Dow Jones Industrial Average. And while all the individual sectors are down, some are like energy directly in the crosshairs. So if you are speculating in weak names like Chesapeake Energy (NYSE: CHK), you should beware: the CHK stock is probably ready for.
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In one of my previous articles on Chesapeake, I noted that a debt agreement to keep the company afloat can attract players. At the time, I was using a football analogy. Basically, the once proud energy company is now staring at a fourth and very long situation. This is not an impossible situation. But many variables have to go right for this to work. In addition, the management does not control the variables that are played.
Debt transaction occurred at the end of last year. In early 2020, however, arose a crisis between the US and Iran. When our military forces killed the Iranian general Colonel Qassem Soleimani, Iran responded with a missile attack on an Iraqi base with US service members. And during the strike, Iran accidentally shot down a Ukrainian airliner – a tragically embarrassing moment for the Islamic Republic that killed 176 people.
However, it seemed that the situation would be positive for the CHK share. With a potentially brewing hot conflict between the United States and Iran, this would limit supply and then push up demand.
But as you know, it did not happen. Instead of an epic battle, the world economy was instead affected by a microbiological threat. And with the spiral corona virus now closing Italy completely, CHK shares are really on fire.
The CHK share is practically bound for introduction
Let me be clear before I get scary emails. I do not suggest that Italy is a make-or-break nation for CHK shares. Rather, I suggest that the Mediterranean country finally understand the draconian measures required to stop the coronavirus. They basically took China’s game book – and it’s the same game book that other countries will have to adopt in order to survive.
Yes, I’m talking about the United States. For some reason, the Trump administration has been slow to respond to the coronavirus. This should apply to all Americans, as the daily infection rate in the United States over the past seven days is 32.8%. During the same timeframe, Italy’s share is 23.3%. However, we risk the same magnitude of crisis if we continue to operate as usual.
Of course, this is a catastrophic negative for the CHK share. If the White House orders an emergency stop by the United States – or even just severely affected areas – demand would simply crater.
But if that does not happen, the Chesapeake will have another, probably insurmountable headwind: tensions that are developing rapidly between Saudi Arabia and Russia.
In an attempt to strengthen falling oil prices, OPEC’s dominant member Saudi Arabia proposed with Russia to mutually reduce production. In previous energy crises – especially the energy market collapse in the middle of the last decade – Russia reluctantly cooperated. But not this time.
From Russia’s perspective, the agreed production cuts in 2016 limited the growth of their domestic energy companies. While Russia is emerging as a global economic power, it is still largely dependent on its natural resources. Obviously, they do not want to give up this critical lever.
In addition, Saudi Arabia and Russia have geopolitical differences. To make a very long, complex history short, the United States is allied with the former – while Russia is in line with Iran. Therefore, this dead end may not end soon.
Time is not Chesapeake Friend
Finally, this leads me to my last argument against the CHK share: it simply does not have the time required to convince investors of a second look.
As the coronavirus is likely to shut down large economic portals, demand for traditional energy sources will be depleted indefinitely. Let us optimistically say that a pharmaceutical company is putting together a vaccine. It takes at least several months to deploy.
In addition, the damage to the global economy to take at least a year to unwind. You also need to recognize the potential of certain industries – such as cruise ships – to absorb lasting pain. Obviously, it would not help the Chesapeake situation.
And let’s face it: if all went well in the markets, the CHK share was still a badly deficient investment. Of course, you can still go for it. But know that you are trying to convert a fourth-and-99 backed to your end zone.
Yes, it can happen, but it is extremely unlikely.
Josh Enomoto, a former Sony Electronics Business Analyst, has helped broker large contracts with Fortune Global 500 companies. In recent years, he has delivered unique, critical insights for the investment markets, as well as for various other industries, including law, construction management and healthcare. At the time of writing, he had no position in any of the above-mentioned securities.