Chesapeake Energy Corporation (NYSE:CHK) has declared that they will issue $58 million worth of dividends to shareholders despite recent efforts to reduce cash outflows. The oil & gas company is currently facing a cash crunch which began at the beginning of the second quarter as gas prices plunged, leaving little margin for profits. CHK is in the process of shifting sectors, essentially transitioning from its core gas business to a more oil centered business. That being said, about 79 percent of the company’s revenues still come from gas sales.
Chesapeake Energy Corporation (NYSE:CHK) is tied up in a variety of business quandaries including a very high level of debt estimated to be approximately $16 billion, which needless to say has caused distress for the Oklahoma-based company’s balance sheet. Because of this, the company has embarked on a mission to lower their debt level by selling some of its longest-lived assets. Included in this mission is a plan to cut the level of debt to $9.5 billion by the end of 2012. Taking into account the cost saving measures of the company, announcement of a cash dividend would have been a near impossible prediction to make.
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Nonetheless, Chesapeake Energy Corporation (NYSE:CHK) announced the $58 million worth of dividends on Monday, which directly translates to 8.75 cents per share to the obvious delight of shareholders. The company’s stock has fallen 25 percent since the beginning of 2012, which means that the dividend could be a confidence booster to investors as capital gains seem well differed to the long-term future. This is justified by the fact that 21 out of 34 recommendations believe that investors should hold the stock, with only six recommending that investors buy the stock.
The company’s recent upgrade came from Stifel Nicolaus on February 16th, just before the gas prices plummeted in April. During the month of May, the stock was downgraded to Neutral as its outlook further dimmed. The big question is, what kind of impact will the $58 million dividend cause on the company’s overall stock price?”– and how material is it likely to be?
Generally speaking, this means that Chesapeake is now CUM dividend until the January 15th. This provides the investors an opportunity to make a choice. That is; they can choose to sell their stock now and gain the short-term capital increase triggered by the announcement, or they can choose to hold on to the stock and receive their dividend payment on January 31st. The stock will definitely lose some of the value that was gained during the CUM dividend period once it goes EX-dividend.
Ultimately it is up to investors to asses whether or not they are likely to gain more from the dividend received than what they could from the short term capital gains. However, as analysts have recommended, holding seems to be the best way to go, but I believe only for those investors planning to hold the stock long-term. If the company properly maneuvers through the transition from gas to oil, and also cuts its debt by a significant amount, then their cash crisis could come to an end, paving the way for a bright future.