Chesapeake: Stuck In The Middle

Summary

• Debt restructuring improves balance sheet.
• Oil rises nicely but natural gas still falling.
• Reverse split chances have increased a little.

A couple of weeks ago I detailed how things looked a little worse for Chesapeake Energy (CHK) as natural gas prices continued to fall. With a major industry player announcing a large write-down, analysts thought this could be the start of a trend in the space. As the new year has started, Chesapeake finds itself in a curious spot, one where it is hard to suggest investors favor either side of the trade.

Let's start with some of the good news. First, the company announced an update to its major debt restructuring plan. With investors having tendered more than $3.2 billion in outstanding notes, Chesapeake boosted its offering of new 11.5% notes for the exchange program. While the overall transaction will basically be interest-expense neutral, it will reduce the amount of debt on the balance sheet by about a billion dollars. As I mentioned in a previous article, it was a no-brainer for investors in the short term to accept the offer, given they were receiving a substantial premium to what Chesapeake's debt was trading at in the public markets.

So let's look at the balance sheet. As reported in the latest 10-Q filing, the company had almost no cash at the end of Q3, along with more than $9.3 billion in debt. Lumping that billion off will certainly help the long-term situation. In the near term, Chesapeake showed about $300 million in debt due this year, which shouldn't be a major problem. It will be interesting to see if the company launches another large debt issuance to perhaps clear some of its debts coming due in the next few years, and if it can get an interest rate better than the 11.5% seen in the latest note issuance. With a market cap below $1.7 billion currently, it's hard to see an equity issuance, because the company would need to dilute investors quite significantly

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