Chesapeake Plays Chicken With Market, Plunges, Blinks, Plunges Some More

In the span of 30 minutes CHK managed to crush both longs and shorts in the name.

First, just after 3pm Eastern, the company filed an NT 10-Q announcing it would delay its 10-Q filing. The reason:

Chesapeake Energy Corporation (the “Company”) is unable to file, without unreasonable effort or expense, its Quarterly Report on Form 10-Q for the period ended March 31, 2012 (the “Form 10-Q”). Additional time is needed for the Company to compile and analyze supporting documentation in order to complete the Form 10-Q and in order to permit the Company’s independent registered public accounting firm to complete its review of the unaudited condensed consolidated financial statements included in the Form 10-Q. The Company intends to file the Form 10-Q later today May 11, 2012.

What happened immediately after was a near vertical plunge in the stock. In fact, the plunge was so bad that the company must have gotten worried it would hit single digits by EOD, and 15 minutes later relented and actually did issue its 10-Q.

At that point we saw a massive short covering spree as the stock soared, then dropped again for no reason, then soared again, and at that point the algos finally had a chance to parse the language in the 10-Q. They were not happy, especially with this part:

As part of our asset monetization planning and capital expenditure budgeting process, we closely monitor the resulting effects on the amounts and timing of our sources and uses of funds, particularly as they affect our ability to maintain compliance with the financial covenants of our corporate revolving bank credit facility. While asset monetizations enhance our liquidity, sales of producing natural gas and oil properties adversely affect the amount of cash flow we generate and reduce the amount and value of collateral available to secure our obligations, both of which are exacerbated by low natural gas prices. Thus the assets we select and schedule for monetization, our budgeted capital expenditures and our commodity price forecasts are carefully considered as we project our future ability to comply with the requirements of our corporate credit facility. As a result, we may delay one or more of our currently planned asset monetizations, or select other assets for monetization, in order to maintain our compliance. Continued compliance, however, is subject to all the risks that may impact our business strategy.

And as that ugly combo: "liquidity", "collateral", "asset sales", "covenant" and "compliance" reared its ugly head, so the stock plummeted and dipped below $15 for the first time in a long while. Unfortunately, there is much more where those warnings came from.

Summarizing visually:

Next steps: CEO departure, epic short covering squeeze, then even faster bleed as the company finally finds its fair value, net of ZIRP.

Finally, we are no too worried about JPM's 3.2 million shares in the company. We are 100% confident they are properly hedged.