Chesapeake Energy Corporation (CHK), the embattled U.S. oil and natural gas producer, has had a tough year. It has lost more than 30% of its market value due to historic low natural gas prices and Aubrey McClendon's potential conflict of interest between his role as CEO/Chairman and his personal stake in some of its assets. Although, McClendon's conflicts have been cleared up, the low natural gas prices have caused a cash crunch.
However, in every crisis, there is some opportunity. Carl Icahn, the legendary investor, has amassed a stake of over 50 million shares (over 7% of outstanding shares). He believes the assets of the company are worth far more than what the stock price belies. He is betting that cutting expenses, liquidating assets, and rising natural gas prices will lift the company.
At HypeZero, it is hard for us to follow Icahn's lead and make a heavy bet of Chesapeake shares. We cannot be sure that natural gas prices will rise or that the assets of the company are as valuable as Icahn believes them to be. However, Chesapeake does offer some interesting alternatives to the common stock that allows investors to make a bet without as much risk. Let's take a look.
During the pinnacle of the crisis, there was money to be made on these bonds. However, Chesapeake has stabilized and the bond prices reflect that. As you can see, all of them trading above the par value and none of them are offering a yield to maturity above 6%. Right now, none of them are suitable investments.
Senior Contingent Convertible Notes
The convertible notes rank equally with the senior notes. Investors looking for safety with some upside might want to examine these securities. Out of the three, only 2.75% note has a realistic conversion price. But, at the current price above of $103 and the stock being around $20, even this is not worth investing in.
Cumulative Convertible Preferred (CHK.PD)
Out of the all the alternatives, the cumulative convertible preferred is the most attractive.
- At the current price, it offers a 5.5% yield. This yield is taxed at the 15% rate and it is cumulative. So if they ever miss a payment, they have to make it up in the future.
- At the current price, the conversion price really becomes around $36/share instead of $43.9142.
- It is junior to senior notes, but still senior to the common stock.
- As long as Chesapeake is not in any serious trouble, the coupon should provide a floor to the price. For example, a price drop from $82 to $60 would make the yield very attractive at 7.5%.
If investors are very confident that natural prices are going to rise and Chesapeake is going to turn it around, then the common shares are the way to go. However, for investors that want the upside of the shares, but still want current income and more safety, the preferred is the way to go.