Chesapeake Energy: A Successful Effort Start To A Speculative Future

Summary

• The going concern worries have finally been laid to rest.
• Now, the key will be increased cash flow from operating activities.
• The last swap to settle increased interest expense and offset the savings gained from the debt and preferred stock for equity deal earlier in the fiscal year.
• Increasing oil as a percentage of production will be a priority to increase cash flow.
• The Eagle Ford and Niobrara leases will be the keys to success.
• This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Get started today »

The last part of the latest series of financial reorganizing accomplished by Chesapeake Energy (CHK) management was just announced a success. More than 99% of the bondholders for the bonds issued by the WildHorse (WRD) related subsidiaries were tendered. There is also a proposal that will be accepted to strip the remaining less than 1% outstanding of their material protection covenants. That should enable Chesapeake Energy to use the cash flow generated by the acquired subsidiaries. Previously, the outstanding bonds prevented any spare cash from being transferred to Chesapeake for general corporate purposes. This completes the efforts of management to avoid that much advertised possible "going concern" warning on the annual report.

Clearly, this management had a lot of financing options available. That potential for a "going concern" warning on the annual statement was an overly conservatively stated warning. This does not mean that Chesapeake Energy is by any means "out of the woods." It does mean that management has clearly dodged a bullet.

The cost of this latest swap is a considerably higher interest rate. The new $1.5 billion line of credit has an interest rate of libor plus 8% (probably at least 10% for all intents and purposes - this one is not cheap!) and it is replacing interest rates of much less. This was the cost to be able to use the cash generated by the former WildHorse Resource Development interests.

Place Your Bets

Clearly, what needs to happen now is the ability of these properties to generate cash in excess of the additional interest paid to be able to use that cash. That may be a good wager given that the leases acquired are in the oil window part of the Eagle Ford. Therefore, these wells tend to generate relatively high percentages of oil in relation to all products produced

Analyst’s Disclosure:I am/we are long CHK. 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.