Chesapeake Is On The Right Track

Apr.21.14 | About: Chesapeake Energy (CHK)


The new debt issue has allowed the company to move the maturity of the debt.

The restructuring of the assets will allow the company to enhance its financial position and product mix.

The restructuring in the debt and assets has made Chesapeake a better prospect going forward.

Chesapeake Energy (NYSE:CHK) was one of the best performers in the energy sector in the last year, and the stock gained more than 63% -- the stock has gained a further 3.8% year-to-date; however, the rise in the stock price has been slow compared to the growth shown by the stock during the last year. One of the reasons can be the overall weakness in the market due to the fears of an impending correction. Nonetheless, the long-term direction of the company is looking good. The company has been reshuffling its assets base, as well as the long-term debt. More recently, Chesapeake has issued some new debt in order to replace the debt maturing in the near term. These debt issues and the sale of some assets have enhanced the financial position of the company and made it a better prospect going forward. We will mainly talk about the debt issue and the asset sale in this article.

The Purpose of the New Debt Issue

During the last few years, Chesapeake has been able to successfully shed some of the non-core assets and direct the funds towards the debt management and investment in high-growth segments. Moreover, the company recently announced the commencement of a record $3 billion bond offering, which is intended to repay its existing unsecured term loan maturing in the near future. In November 2011, the company entered into a five-year $500 million senior secured credit facility, which will mature in 2016. Chesapeake is raising new debt through senior notes by taking advantage of low debt costs with floating yields of between 2.54% and 3.25% more than the benchmarks, with the earliest senior notes maturing in 2019.

The company initially expected to issue the series of these senior notes in three separate series: First maturing in 2019, another in 2022 and the last maturing in 2026. However, the company recently announced that the notes will be issued in two separate series, with $1.5 billion of floating rate notes due 2019, with an equivalent position of 4.875% securities maturing in 2022, which is above the standard benchmarks. Moreover, the proceeds will be used to repay an existing unsecured term loan that matures in 2017, fund a tender offer for debt due 2015 and redeem 2018 securities. Provided that the interest rates don't rise significantly, the company should save this money obtained by redeeming notes with a higher yield.

The reshuffling of the debt will allow the company to extend the maturities of its debt, and the short-term obligations will be minimized. Chesapeake also plans to use the net proceeds for general corporate purposes, which may include the purchase, repayment and redemption of outstanding indebtedness. The reduced debt burden will also enable the company to decrease its interest costs, resulting in more free cash flows to distribute to its shareholders.

Further Restructuring of Assets

As mentioned earlier in this article, Chesapeake is trimming down its asset base in order to retain the most profitable and efficient assets in its portfolio. The company announced another possible spin-off of its oilfield services subsidiary which offers crucial exploration services, such as hydraulic fracturing, contract drilling and rig relocation. The company not only achieves better market recognition for its high-growth oilfield services business spin-off, but it also helps in divesting a debt worth of $1 billion from its balance sheet.

The spin-off news did not affect the share price of the company largely; however, it will lead the company to improve its focus towards future stability and growth. The company has also chosen to rename the oilfield services division as "Seventy Seven Energy", which will be traded on NYSE under the symbol SSE. According to the Form 10-K, Seventy Seven Energy operates a fleet of land-based drilling rigs, consisting of a total of 85 rigs. Chesapeake is working aggressively on decreasing its cost, net long-term debt, improve its cash position and net working capital. Also, the appreciating natural gas prices in the coming years will strengthen its balance sheet and revive the company's position in the natural gas market.


Chesapeake is on the right track, and the recent moves will go a long way in enhancing the future profitability of the company. The reshuffling of the debt will allow the company to delay its obligations and save some cash in interest savings. Furthermore, the divestment of the oilfield services will allow the company to focus on the crude and natural gas segments - as the crude and natural gas prices are expected to remain strong; the company is set to benefit from the strong pricing environment in the commodities segment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.