Chesapeake Energy reversed course today after Wednesday’s rally as analysts at RBC Capital Markets downgraded it from Sector Perform to Underperform. They said the company has a “long road to recovery” and that they’re concerned about leverage. Shares of Chesapeake Energy slumped by as much as 3.92% to $4.78 after RBC’s report on Thursday.
Chesapeake Energy “not a layup”
Analyst Scott Hanold and team set a price target of $5 per share for Chesapeake Energy, saying that the company has $2.2 billion in debt principal coming due over the next year and a half. That includes more than $1 billion in puttable convertibles. However, they do think the company can manage these maturities, as it has announced debt-for-equity exchanges recently that have chipped away at some of them, including more than $440 million since early last month.
They estimate that Chesapeake needs between $1.5 billion and $2 billion in liquidity through the end of 2018, but they add that it has options, including $3 billion left on its bank revolver, net of Letters of Credit. It could also add $2.5 billion in first lien debt.
Chesapeake Energy won’t see much free cash flow
The RBC team adds that the company might “be in asset harvest mode for some time” as there’s an additional $1 billion to $1.1 billion worth of notes due in 2019 and 2020, so as a result, they don’t think it will generate much in the way of free cash flow through then. They expect management to keep pursuing transactions to chip away at the debt maturities and see asset sales with “low EBITDA contribution and discounted debt repurchases as being the most accretive to leverage.
They believe Chesapeake Energy should conduct more transactions like the recent sale of acreage in Oklahoma. They estimate that the land sold for about $10,000 per undeveloped acre, excluding PDP value, which they say was good.
Hanold and team expect things to look better next year, however as they expect production to remain about flat thanks to the budget of $1 billion to $1.5 billion. They expect negative free cash flow this year but believe it will neutralize next year.
The last month and a half has encompassed a difficult time for a company with an embattled past. Chesapeake Energy shares popped early last month thanks to the company’s solid earnings report, but then they crashed as firm after firm piled on the criticism. Wells Fargo, Credit Suisse, Wunderlich and Barclays all issued negative reports within the last several weeks.