California Resources on the verge of bankruptcy!

The oil driller is preparing near-term bankruptcy filing, WSJ reports

California Resources Corporation (CRC) operates as an oil and natural gas exploration and production company in the State of California.

The company sells crude oil, natural gas, and natural gas liquids to marketers, California refineries, and other purchasers that have access to transportation and storage facilities. It holds interests in approximately 2.2 million net acres of mineral acreage. As of December 31, 2019, the company had net proved reserves of 644 million barrels of oil equivalent.

Interest Payment

California Resources skipped an interest payment to lenders and could file for bankruptcy as soon as next week, The Wall Street Journal’s Alexander Gladstone reports, citing people familiar with the matter.

The company said in an 8-K filing that it entered into forbearance agreements most of its lenders, who have agreed not to exercise “remedies” under the credit agreements. 

The oil driller said Monday it has entered into an agreement with a majority of its senior lenders to wait until Sunday before they can declare a default, the author notes.

2-Year price chart for CRC

The company has suffered from a sharp selloff in crude oil futures prices to start this year, as a result of the drop in demand from the COVID-19 pandemic and the price war between Saudia Arabia and Russia.

CRC is up 67 cents to $2.68.

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In the market for a used car? You are in luck

A Hertz bankruptcy will flood the market with used vehicles

If you are in the market for a used car, you are in luck. That is, if you have a place to drive to!

According to the Detroit Press, used car prices fell 34.4 percent in April alone. The paper offers solace to it’s readers by mentioning that  used car prices could go up soon due to a shortage of new cars caused by plant closures. The paper however, failed to mention the nearly half a million cars currently sitting ideal on Hertz car lots. With practically no one traveling these days, the need for rental cars has evaporated. Hertz (HTZ) and Avis-Budget (CAR) have suffered the most. Hertz has bigger problems than COVID-19 and that is it’s balance sheet.

There are several stories suggesting a Hertz bankruptcy is around the corner.

Hertz is near bankruptcy

According to Bloomberg, Hertz’s situation is a three-way standoff between Holders of Hertz’s asset-backed securities. They could delay pressuring Hertz to sell down its fleet for a short period of time, but they will need Hertz’s banks to promise to make them whole. The banks, in turn, may not want to take on such a risk, which requires them to bet that either the rental car business or used car prices return to some normal operating level.

A 2-year price chart of Hertz (HTZ), Stockwinners

Meanwhile, controlling shareholder Carl Icahn (IEP) holds a 39% equity stake in the rental company. Bloomberg says that he could put in more money to keep Hertz afloat, but this once again is dependent on a belief that the rental car business will recover to some extent in the very near future.

Carl Icahn

In a bankruptcy, Bloomberg notes, equity holders’ claims would be behind those of creditors, which is not an incentive for Icahn to put in more money at the moment.

Used car prices have fallen sharply due to Covid-19

A Hertz bankruptcy could flood the used car market with several hundred thousand cars, whose value is likely to take a substantial hit at a time when used car lots are already quite full and demand is low.

Companies now deliver used cars to your home for test drives

Bloomberg notes that used car prices dropped 11.4% from March to April, while sales were merely a quarter of pre-outbreak levels.

Meanwhile Hertz has started discounting its cars on its used car lots and Hertz Car Sales. In fact, you can pick up a car, and they will deliver it to your house for a test drive. We have seen discounts as high as 25% on some models.  The company carries brands like Ford, Chevrolet, Toyota and Nissan, to some luxury brands like Audi, Jaguar and Mercedes-Benz.

Cars are discounted by Hertz

One more footnote to this story: auto dealerships usually set their used car prices as a function of new car prices. With most of the domestic auto plants closed, price of new cars (2021 model year) will not be known anytime soon.

Companies in the space include: Copart (CPRT), CarMax (KMX), Carvana (CVNA), CarGurus (CARG), Penske (PAG). AutoNation (AN). 

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Chesapeake Energy may file for bankruptcy

Chesapeake Energy slides as company considers bankruptcy, strategic alternatives

Shares of Chesapeake Energy (CHK) are tumbling after the company warned that it might not be able to stay in business amid low commodity prices caused by a global price war and depressed demand due to the COVID-19 pandemic.

Chesapeake is near bankruptcy

EVALUATING STRATEGIC ALTERNATIVES:

On Monday, Chesapeake Energy announced that it filed its Form 10-Q for the three-month period ended March 31, 2020 and, in light of the unprecedented market environment, has withdrawn the financial outlook it previously provided on February 26, 2020.

The company also reinstated a “going concern” warning. “Fluctuations in oil and natural gas prices have a material impact on our financial position, results of operations, cash flows and quantities of oil, natural gas and NGL reserves that may be economically produced.

Historically, oil and natural gas prices have been volatile; however, the volatility in the prices for these commodities has substantially increased as a result of COVID-19 and the OPEC+ decisions […]

Historical oil prices represented in 2020 dollar, Stockwinners

If the current depressed prices persist, combined with the scheduled reductions in the leverage ratio covenant and an expected significant reduction in our borrowing base in our scheduled determination, then our liquidity and our ability to comply with our financial covenants during the next 12 months will be adversely affected,” Chesapeake said in the filing.

Boom to bust for CHK

“Based on our current forecast, we do not expect to be in compliance with our financial covenants beginning in the fourth quarter of 2020. Failure to comply with these covenants, if not waived, would result in an event of default under our revolving credit facility, the potential acceleration of outstanding debt thereunder and the potential foreclosure on the collateral securing such debt, and could cause a cross-default under our other outstanding indebtedness.

As a result of the impacts to the company’s financial position resulting from declining industry conditions and in consideration of the substantial amount of long-term debt outstanding, the company has engaged advisors to assist with the evaluation of strategic alternatives, which may include, but not be limited to, seeking a restructuring, amendment or refinancing of existing debt through a private restructuring or reorganization under Chapter 11 of the Bankruptcy Code.

However, there can be no assurances that the company will be able to successfully restructure its indebtedness, improve its financial position or complete any strategic transactions. As a result of these uncertainties and the likelihood of a restructuring or reorganization, management has concluded that there is substantial doubt about the company’s ability to continue as a going concern.”

REVERSE STOCK SPLITs NEVER WORK:

Chesapeake stock has lost about 50% of it’s value since a 1-for-200 reverse stock split took effect after the close of trading on April 14, 2020.

The company had implemented the reverse split to raise its share price enough to regain compliance with listing standards, but it was viewed as validation of investor concerns as the company struggled with falling commodities prices, high debt levels and the effects of the COVID-19 pandemic, the author added.

The company lost its way after Aubrey McClendon, a founder and former chief executive of Chesapeake Energy, died in a fiery car crash in 2016, a day after he was charged with conspiring to rig bids for oil and natural gas leases. Many believe he committed suicide.

Aubrey McClendon

McClendon — a key player in the U.S. shale boom — co-founded Chesapeake in 1989 and stepped down from the company in 2013. Chesapeake used to be the second-largest natural gas producer in the United States.

PRICE ACTION: In afternoon trading on Tuesday, shares of Chesapeake have dropped almost 22% to $10.13.

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