Struggling Chesapeake stock rebounds after takeover speculations

Chess pieces
Source: DollarPhotoClub

Chesapeake Energy – a company many see as synonymous with the U.S. shale boom – announced last Wednesday a cut of up to 69 per cent in its capital spending for 2016, after it reported a $14.9bn net loss for 2015. But it was a prediction made by the financial blog Seeking Alpha that the company might be ripe for acquisition that sent Chesapeake – the worst-performing stock in the S&P 500 index last year – soaring. The company’s stock rose 20 percent to $2.39 on Monday in New York for the biggest one-day increase since December 2008.

Chesapeake has advanced for five consecutive sessions, racking up 50 percent in gains, after Bloomberg reported on Feb. 12 that the company plans to pay $500 million of debt maturing next month.

The company, which pumps more US gas than any other operator, apart from Exxon Mobil, found itself in dire straits when oil prices plummeted in 2015 adding to the strife of already low natural gas prices.

According to the Financial Times, the principal factor behind the company’s $14.9bn net loss for 2015 – as compared to a profit of $1.3bn in the previous year – was an $18.2bn pre-tax writedown of Chesapeake’s assets, to reflect lower commodity prices.

As Bloomberg reports, the company has a $9.8 billion debt load that is six times its market valuation, and more than $1 billion in debt payments due between now and the end of 2017.

Chesapeake’s operating cash flow dropped 56 per cent to $2.3bn last year, with the company’s shares dropping 86 percent during the same period.

Despite that, the company vehemently denied rumours that it may face bankruptcy, instead announcing that it is aggressively seeking to maximize value for all shareholders.

Chesapeake said it had a $4bn borrowing facility of which only $77m had been used. It added it expected that credit line would be renewed at a “really strong” level when it was determined with lenders in April.

Also, after rumours that the company might be ripe for a takeover, Chesapeake’s stock rebounded, posting a gain of over 50 percent, partly recovering from the crash in its stock price over the bankruptcy rumour. The stock is still 67 cents down from its closing price on February 7.

But this is not the end of problems for the troubled company. After ratings agencies Moody’s and Standard & Poor lowered the company’s credit rating “further into junk territory” in December, Chesapeake Energy’s counterparties, including pipeline companies, have now asked for about $220 million in collateral. It has already posted about $92 million in the form of cash and letters of credit, but the request has led to fears that the gas producer may have to put up $698 million in additional collateral, and this would adversely impact its liquidity.

The company has been working hard to put its house in order, laying people off, restructuring debt, closing offices and selling parts of its portfolio to raise cash. It said on Wednesday it has signed agreements to divest $700 million in gas fields and other assets and plans to sell another $500 million to $1 billion in properties this year while shutting down at least half the drilling rigs it has under contract.

The company is slashing its capital spending plan for this year in half, to between $1.3 billion and $1.8 billion, and will spend most of that money on bringing online wells it previously drilled.

“We are also renegotiating gathering, transportation and processing contracts to better align with our current development plans and market conditions, aggressively working to minimize the decline of our base production and making shorter-cycle investments with our 2016 capital program,” CEO Doug Lawler said in announcing Chesapeake’s most recent financial results, adding that the slowdown in drilling would lead to its production falling by up to 5 per cent this year, excluding the effect of asset sales.

Article continues below this message

Have your opinion heard with Shale Gas International

We accept interesting, well-written opinion and analysis articles of up to 1,500 words, that offer unique insights into the shale industry. The articles cannot be overtly promotional in nature and need to fit into at least one of our content categories.

If accepted, the article must be exclusive to Shale Gas International website and cannot appear on any other websites, publications, etc. Each article may contain up to three links to external websites relevant to the content discussed in the piece.

If you would like to contribute to Shale Gas International website, please contact us at: editor[at]mw-ep.com