Chesapeake Energy Corporation (CHK) is having a wild ride today. The company’s shares have been halted seven times. The stock is currently down 22% and was down as much as 50% or so on news that the company was mulling bankruptcy. The natural gas giant put out a press release that the news was not true. Here is what the sell-side is saying on that news but first some background from the past few days.
Barclays on January 22nd:
CHK pays over $40 million per quarter in fixed rate dividends and would save roughly $170mm per year with continued suspension. CHK’s four series of convertible preferred stocks are all cumulative and would accrue until they can be paid.
Michele Ragazzi's Giano Capital returned 1.9% for March, taking the fund's year-to-date performance to 1.7%. Since its inception, Ragazzi's flagship fund has produced a compound annual return of 7.8%. According to a copy of the €10 million fund's March update, a copy of which ValueWalk has been able to review, Giano's most significant investment at Read More
CHK’s suspension does not constitute an event of default under the company’s credit facility or outstanding bond indentures.
Chesapeake Energy Corporation will use the funds to purchase its debt at significant discounts in the near term.
RBC on that news
We think the preferred dividend suspension is a prudent decision to further conserve cash and potentially reduce financial leverage. We think there is a large FCF deficit still to bridge in 2016 of $500+ million, with asset sales the most likely source of incremental capital.
Now today’s news…
Sterne Agee CRT
We believe CHK shares’ underperformance today is warranted, given a slew of negative data points. They include: 1) Multiple media reports since Saturday reiterating well-understood near-/medium-term liquidity risk, 2) weak price action in Chesapeake credits today, and 3) acknowledgment by the marketplace that lending banks will be more cautious when lending to highly levered E&Ps like Chesapeake. Macro and company-specific risks continue to plague Chesapeake, and we remain Neutral on CHK shares as we see little chance of a sustained $3/ mcf gas price healing the balance sheet this year.
This morning’s news has the stock down as much as 40% intraday. Our call and email to IR were not immediately returned. We continue to see better risk-reward in other names but we note that while CHK has little equity value at spot prices, our target price reflects a world of $68 WTI and $3.00 Henry Hub. If CHK can remain a going concern long enough, the stock would rebound along with commodity prices.
We will let readers judge this one!