As oil and gas prices seem to be settling in at low levels for the longer term, reality is starting to set in across the energy sector, and it’s not a pretty picture in some cases.
According to Forbes’ Christopher Helman, oil and gas firm Chesapeake Energy is in “pretty bad shape.” Helman highlights that Chesapeake shares have lost 67% of their value over the last year to trade at $8.70 today. Trapped by depressed hydrocarbon prices and ongoing commitments to pay for infrastructure, the former “shale gas king” now has a market cap of less than $6 billion and dropping.
A decade ago, no one talked about tail risk hedge funds, which were a minuscule niche of the market. However, today many large investors, including pension funds and other institutions, have mandates that require the inclusion of tail risk protection. In a recent interview with ValueWalk, Kris Sidial of tail risk fund Ambrus Group, a Read More
Details on Chesapeake Energy’s troubles
Chesapeake Energy provided an earnings report last week that was cold comfort for investors. After beginning the year with $4.1 billion in cash, the firm closed the first half with just $2 billion. Given that Chesapeake has not bought or sold ant assets yet this year and has reduced its capex levels by 40% over last year, that means this one billion a quarter cash burn rate represents the problematic state of the firm’s underlying business.
Helman notes that “this highly leveraged company is becoming even more leveraged. In the first half, total debt net of unrestricted cash increased from $7.4 billion to $9.5 billion. As profitability has collapsed, net debt has risen to more than 6 times annualized Ebitda.”
He goes on to point out that 4X annualized Ebitda is generally considered pretty high, so 6X seems like a major problem for a business that needs to refinance $5 billion in debt over the next five years.
Chesapeake’s has idled a good bit of its acreage over the last year as it is uneconomic to drill, and related to this, the firm took a $10 billion asset impairment charge in 1H. Writing down the value of assets means the balance sheet melted away from $40.8 billion on January 1 to $29 billion on July 1. Moreover, the ratio of net debt to total capitalization surged from an already high 30% to a flashing red 50%.
Chesapeake Energy revenues from oil and gas and NGLs have been very poor according to Bernstein Research, totaling $728 million in the second quarter, versus $1.7 billion the second quarter a year ago.
To be fair, Chesapeake is perhaps not quite “on the ropes” yet, but unless oil and gas prices move back up within the next few quarters, the firm will clearly have to start selling assets (likely at fire-sale prices) or take other even more drastic steps to remain solvent.