The Robinhood Gamblers And Chesapeake Energy Corporation

Jun. 17, 2020 11:28 AM ETChesapeake Energy Corporation (CHK)79 Comments

Summary

  • Chesapeake Energy is about to file for Chapter 11 and it's most, most, unlikely there will be a distribution to stockholders.
  • Given the wildness of our times that does not mean that the stock is - necessarily - about to go straight to zero. What the gamblers at Robinhood do matters.
  • Which is where it gets complicated, for what is it that they're going to do?

Chesapeake has been stumbling along under its massive debt burden for some time now. There was always the possibility of some Hail Mary pass if the fossil fuel markets leapt of course but the coronavirus has rather put paid to that.

The company just isn't going to survive as it is and as we're being told it's going to file for Chapter 11 imminently.

Chesapeake Energy (NYSE:NASDAQ:CHK) is in the final stages of negotiating a roughly $900M debtor-in-possession loan, as well as "rolling up" some of its existing debt to bring its total DIP financing near $2B, Reuters reports.

It's also attempting to negotiate an equity infusion, and if the company manages to emerge from bankruptcy, creditors that include Franklin Resources (NYSE:BEN) would take over Chesapeake in exchange for eliminating more than $7B of its debt.

A Chapter 11 filing could come as soon as Thursday, but the timing could slip to next week depending on how the negotiations play out.

First question

The first question is whether there's any equity left in there for the stockholders to gain. The answer is no, obviously not. I'm not going to go out and prove that not when others here at Seeking Alpha have already done so. Try here, or this which contains this vital information:

The bond comes with an 11.5% interest payment due in two annual payments of 5.75% each, so this price indicates that the marginal seller of the bonds does not believe he will receive that 5.75% payment due July 1.

It follows from the rules of bankruptcy priority that all the debt junior to the 2nd lien bonds will not be repaid, either. That is to say that the bond prices are telling you that the company will likely default on more than $2.2 billion in secured debt and

This article was written by

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Tim Worstall is a wholesaler of rare earth metals and one of the global experts in the metal scandium. He is also a Fellow at the Adam Smith Inst in London and an writer for a number of media outlets, including The Times (London), Telegraph, The Register and even, very occasionally indeed, for the WSJ. This account is linked with that of Mohamad Machine-Chian: https://seekingalpha.com/user/52914142/comments

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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