Chesapeake Tenders To Rearrange Its Debt

| About: Chesapeake Energy (CHK)
This article is now exclusive for PRO subscribers.

Summary

$1 billion in new notes should enable the refinancing of near term debt amounts due. The long term debt structure will be more favorable after the tender offer completion.

The new notes have an 8% interest rate. The transaction costs and tender premiums probably eliminate any future significant savings, though there may be some small savings.

The company will gross $470 million from the sale of some Haynesville Shale properties. More acreage is for sale and the company should probably exit the play completely.

Sales will continue because there is not enough cash flow from operations to stabilize the company without more property sales.

So far, the bankers have supported the reorganization but the acceleration of property sales may indicate some bank nervousness. Much More cash flow from operations is needed.

On December 6, Chesapeake Energy (NYSE:CHK) privately placed an upsized $1 Billion long term debt offering to eligible private parties.

Source: Chesapeake Energy December 6, 2016 Press Release

The company will clear one hurdle by refinancing the remaining debt due before 2019. In the process, the 2019 debt could be substantially reduced or hopefully eliminated if Mr. Market likes the offer enough. The new debt is slightly more expensive than the debt being retired, plus a fair amount of debt will be retired at a premium. So the primary benefit will be the elimination of long term debt due shortly. Whatever savings or extra expenses accrue from the deal are really not that significant to a company the size of Chesapeake.

The company also sold a significant part of its Haynesville Shale lease position in Louisiana for about $450 million. The announcement that much of its acreage was considered core may indicate that management is considering exiting this play or at least a significant part of the play to pay off debt. Indeed the same announcement indicated that more acreage was being marketed and management expected that acreage sale to close in the first quarter.

The company has needed to consolidate for some time. Frankly something had to give. As noted in previous articles there was just no cash flow to support the debt load, let alone the preferred stock and the common stock market value. So the logical thing is to sell a whole area, close the offices and lay off the supporting staff, then concentrate on the remaining areas. This company has some onerous agreements to undo as well. So there is still plenty of work to be done. Maybe management is coming to terms with the idea that a partial liquidation is the best way to go to simplify the current balance sheet mess.

In the same announcement, management has noted that it retains about 250,000 net acres in the area. So the logical thing to do is probably sell this acreage for whatever cash management can get, pay down more debt, and then keep going. Concentrating on less geographic areas could be a money saver all by itself. At some point, onerous agreements will be rewritten, and cash flow will begin to build. Management has already made some substantial cost savings moves to improve cash flow next year. But many more will be needed. A company this size usually improves at a pretty slow pace, though shareholders and Mr. Market clearly hope for something better.

In the meantime, the foreseeable future holds more property sales and maybe some joint ventures to provide some badly needed cash flow. More downsizing to get rid of more debt, and bring some key ratios back to reasonable levels. So far the bankers have stood by the company during the reorganization, but lately the reorganization pace has accelerated so the bankers may be getting a little nervous. Most likely though the company has made enough progress that the creditors will allow management to continue with the property sales and debt reorganization. Significant increases of cash flow from operations is probably needed as a priority long term goal.

So the stock will probably continue to fluctuate as the announcements are made. But the long term value of the common and preferred stock is far from clear. The bond prices indicate that the threat of bankruptcy is very minimal if there is any threat at all. But that is very different from the future of the common stock which depends upon cash flow, sales, and earnings. So right now, the common stock, and probably the preferred stock also, are great trading vehicles for the momentum crowd. But long term shareholders are probably far safer watching the show from the sidelines.

Disclaimer: I am not an investment advisor and this is not a recommendation to buy or sell a security. Investors are recommended to read all of the company's filings and press releases as well as do their own research to determine if the company fits their own investment objectives and risk portfolios.

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

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.