Did Chesapeake Energy Get The Desired Results From Tender Offers?

| About: Chesapeake Energy (CHK)

Summary

Debt levels for near-term maturities are coming down.

Convertible notes tender offer was fully subscribed.

The management might want to use the open market or private transactions for further reduction in debt.

Chesapeake Energy's (NYSE:CHK) most recent tender offer results are in and we can now see whether the company was able to get the desired results in both tender offers. For the convertible notes tender offer, the answer is yes. The company was able to achieve its tender caps and all the allocated funds were used to redeem the convertible notes. However, the non-convertible notes tender offers that targeted the shorter-term maturity notes were not as successful. First, let's look at the convertible notes.

Source: Press Release

Both these notes were almost fully subscribed. 2037 notes had $114.6 million outstanding and more than $104 million worth of notes were tendered. Since the tender cap was set at $100 million, almost $15 million will still remain on the balance sheet. Keep in mind that the consideration for these bonds has a premium of 0.5% so the total reduction will be around $99.5 million. 2038 notes had $199.7 million outstanding and the consideration offered had a discount of 1.5%. So, the reduction in total debt for this issue will be around $187 million. After the tender offers, these two issues should have a combined outstanding debt of about $27-28 million.

2037 notes were trading at a discount of about 2% when the company offered to redeem these notes. The bondholders deemed this a sufficient premium and we can see that the majority offered their notes redemption. 2038 notes were also trading at a discount of 2% on the day tender offer was announced. It is interesting that 0.5% premium on the market value prompted such response from the bondholders. Both these notes are trading at around the same discount levels and Chesapeake management might want to completely eliminate these convertible issues in order to free up some collateral for any future borrowings.

For the second tender offer, Chesapeake did not get the desired results as the company was not able to use all the cash which was earmarked for these notes. We already know that 2017 6.5% notes were redeemed completely after the initial results of the tender offer. Other than that, only $554.1 million worth of notes were presented for redemption. If we include the $132.7 million used for the 2017 notes, then the total amount goes over $686.8 million. The management had earmarked a total of $1.2 billion for this tender offer. In my previous article, I argued that the management should look to allocate more cash towards the debt maturing between 2017-2019. Total debt outstanding in this range was $1.1 billion before the tender offer.

After the settlement of this tender offer, this debt obligation has come down to around $443 million. Since this tender offer was not fully subscribed, Chesapeake Energy will be left with an additional cash of around $550-600 million. This means that the total cash balances will be around $2 billion. This cash along with the cash generated from operations, will be more than enough for the next year. In fact, there is still room for the company to use that remaining cash from the tender offer to buy some debt from the open market. 2019 bonds are trading at a discount while the 2018 bonds have a premium of between 5.4-6%. The trend in price for the 2018 bonds shows that the market has been expecting the company to do something about this issue. In the last two months, the premium has jumped from around 2% to 6%.

I am still of the view that the management should look at using those $500-600 million towards buying 2018 and 2019 notes from the open market or in private transactions. The company might have to pay a higher premium in these transactions but it will give the management a lot of room to plan their capital spending in the next three years. These three years are going to be important in the oil market as the commodity prices are expected to recover considerably in the next two years. Having no worry about making debt payments will allow the management to focus on the efficient use of the capital program. Again, this is not the last tender offer or debt reshuffling we have seen from Chesapeake. The management will continue to fiddle with the debt maturities until they achieve the desired results. I believe they want to eliminate near term maturities so that they can operate without any fears in the next 2-3 years. Good work by the management in reducing near-term debt maturities but it is not over yet.

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.

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