Chesapeake Energy Corporation (NYSE:CHK) was up by over 6% during premarket hours today after Jefferies resumed coverage of the stock. Citing high debt piles and further equity dilution, they kept their Underperform rating unchanged but increased their price target from $2 to $3.
Further equity dilution could “could be severe” for Chesapeake
Jonathan Wolff of Jefferies believes further equity dilution “could be severe” for the energy company, which is depending heavily on debt-to-equity swap, a way to waive debt in exchange for new shares. Though this strategy will lower the company’s debt, it will also dilute the ownership of existing shareholders.
“We are resuming coverage of CHK with an Underperform rating and a $3 PT. Recent actions have materially reduced the risk of default/liquidity issues (debt-to-equity exchanges, asset sales, re-affirmation of RBL). But overall obligations remain very high, volumes are declining, asset quality looks subpar and significant further equity holder dilution is likely,” says Wolff.
Chesapeake’s long-term debt is on the rise, despite the fact that its been 24 months since the oil price collapse began. This suggests that the Oklahoma City-based company is unable to generate enough profits and is financing its operations with debt. Though there are no bond maturities in 2016, Chesapeake still needs to pay interest amounting to $261 million.
Next year, the company has to pay $1.16 billion, including $658 million towards bond principle payments and the remaining towards interest payments. As of March 31, Chesapeake Energy Corporation (NYSE:CHK)’s cash and cash equivalents totaled $16 million.
Some fight back in 2016
In 2016, Chesapeake Energy Corporation (NYSE:CHK) stock has shown some strength despite low oil and gas prices. In contrast, 2015 was disastrous for the company with its stock dropping by almost 78%. Similar to other energy companies, Chesapeake Energy has made all efforts to deal with the downturn, including laying off employees, asset divestiture plans and reducing capital and operating expenditures.
This year, the energy company has already raised about $1.3 billion from asset spin-offs. For 2016, its asset disposal target is $1.2 billion to 1.7 billion. The company is currently in the turnaround phase and has suggested that more assets will be disposed to maintain cash and preserve its balance sheet. The company’s total debt stood at $10.06 billion, with a staggering debt-to-equity ratio of 662.32%.
Despite its grim condition, Wall Street analysts recommend a Hold rating on the stock. Of the 34 analysts covering the stock, two rate it a Buy, 20 consider it a Hold, and the remaining see it as a Sell. The average price target on the stock is $4.67.
At 9:36 a.m. Eastern today, Chesapeake Energy Corporation (NYSE:CHK) shares were up 4.21% at $4.67. Year to date, the stock is up almost 7%, while in the last year, it is down by over 60%.