Bankruptcy or restructuring are on the cards for Chesapeake, U.S. second-largest natural gas producer, according to energy trader John Arnold, formerly of the hedge fund Centaurus Advisors.
Speaking to CNBC, John Arnold said that the company’s “legacy costs are overwhelming” and “they have too much debt.”
Chesapeake Energy announced in a statement that Kirkland & Ellis LLP continue to advise the company as it seeks to further strengthen its balance sheet following its recent debt exchange. The company stated that it has no plans to pursue bankruptcy and is aggressively seeking to maximize value for all shareholders.
Despite these assurances the company shares plummeted as much as 50 percent on Monday – down by $1.01 to $2.05 a share. Also, the company’s notes due March 2016 were trading at 83 cents on the dollar, after earlier falling by a record to 74 cents, causing concern among investors that the company may not be able to pay off the $500 million bonds, according to Tim Rezvan, an analyst at Sterne Agee & Leach Inc. Bonds maturing in 2017 fell to an all-time low of 25 cents.
The biggest gas producer in Pennsylvania and a company many see as synonymous with U.S. shale revolution, Chesapeake is laden with debt eight times higher than its market value. Despite that, the company stands defiant against the doom-sayers, denying rumours of impending bankruptcy.
“The company still has an undrawn $4 billion credit facility available to it, and we think they ended 2015 with some cash on hand,” said Tim Rezvan.
Standard & Poor’s has lowered the corporate credit rating on Chesapeake Energy Corp. from CCC+ to CCC, commenting: “The downgrade reflects the potential that Chesapeake could pursue a further debt exchange over the next 12 months and that we would view a transaction as distressed rather than opportunistic, and which we would consider a selective default.”
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