Chesapeake Energy - Bad News For Stockholders

| About: Chesapeake Energy (CHK)


CHK is down ~34% YTD, slumped ~16% on Monday.

Chesapeake Energy informed stockholders on Friday that it has suspended dividends for its convertible preferred stock.

S&P has downgraded Chesapeake Energy's credit rating to CCC+.

Embattled oil and natural gas company Chesapeake Energy (NYSE:CHK) is getting it from all sides at the moment. Crude oil prices fell below $30 per barrel again on Monday which played to investors' fears that bankruptcies in the levered oil patch are looming on the horizon. With oil trading at just $30 per barrel, many development projects need to be canned, simply because they are no longer economically viable. Therefore, with oil heading lower again at the start of the week, energy companies including Chesapeake Energy were ripe for another beating.

Chesapeake Energy got clobbered on Monday with shares losing ~16% and closing below $3. But lower oil prices were not the only reason to blame for yesterday's massacre. On Friday, Chesapeake Energy informed stockholders that it was suspending dividend payments on its convertible preferred stock. The fact that the company suspended preferred dividend payments with "immediate effect" added to the notion that things are not looking good for Chesapeake Energy right now.

The preferred dividend suspension comes after the energy company cut its regular dividend payments in 2015 for the same reason: To conserve cash.

Chesapeake Energy's Chief Executive Officer Doug Lawler said that the dividend suspension will help the company in its effort to de-lever the company:

The board and management believe this decision is in the best long-term interest of all Company stakeholders. Today's decision to suspend our preferred stock dividends will allow the company to retain approximately $170 million of additional cash per year and use these funds to purchase debt at significant discounts in the near term. Given the current commodity price environment for oil, natural gas and natural gas liquids, we believe that redirecting this cash toward debt retirement provides better returns for the Company. We currently have senior debt securities trading at significant discounts, and we will continue to take advantage of that within the coming year.

Buying back high-yielding debt at substantial discounts to par value makes a lot of sense for Chesapeake Energy given that debt concerns have seized center stage lately. Other upstream companies including Linn Energy, LLC (NASDAQ:LINE) have also used the opportunity and bought back senior notes at high discounts to par value. In the case of Linn Energy, the company managed to buy its senior notes at a discount of up to ~35% in 2015.

If that wasn't enough, credit rating agency Standard & Poor's added fuel to the fire by downgrading Chesapeake Energy's credit rating from 'B' to 'CCC+'.

Chesapeake Energy's suspension of preferred dividends underscores that the company is grasping for straws and uses every rule in the playbook to survive a bear market where market prices are substantially below breakeven prices. Sad to say, but Chesapeake Energy's fourth quarter earnings are unlikely to give investors any reasons to buy the stock either.

Your Takeaway

It was bad news after bad news for Chesapeake Energy: Oil prices fell below $30/barrel, it was forced to suspend its dividend on its convertible preferred stock, and the company saw its credit rating being downgraded by Standard & Poor's. That was not a good recipe for starting the week on a strong note. More downside looms if oil prices can't build a bottom in the very near term.

Disclosure: I am/we are long LINE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.