Owners of Chesapeake Energy (NYSE:CHK) stock are cheering today, as not one, but two separate analysts mark up their valuations on the stock -- and one even gives Chesapeake an upgrade.
This morning, analysts at Barclays announced they are tripling their price target on Chesapeake Energy stock (albeit only from $1 to $3). At the same time, analysts at Capital One have removed their underweight (i.e., sell) rating from the stock, and upgraded Chessie to equalweight (i.e., hold). Along the way, Capital One says it has raised its price target on the shares from $4 to $6.
Mind you, neither analyst is yet saying you should buy Chesapeake Energy stock. But they are becoming incrementally more optimistic about the shares. Are they right?
Here are three things you need to know.
1. A debt rollover
Let's tackle these ratings changes in reverse order. According to ratings reporter TheFly.com, Capital One's main reason for upgrading Chesapeake Energy stock is that...it's a bit less likely to go bankrupt today than it used to appear.
Yesterday, you see, Chesapeake announced that it's working with three investment banks to secure a new $1 billion bank loan to give more "financial flexibility" and permit "the retirement of existing debt with upcoming maturities." Specifically, Chesapeake intends to use its $1 billion in loan money to buy back $500 million worth of non-convertible senior notes, and $500 million more of contingent convertible senior notes. According to Capital One, this move will improve Chesapeake's balance sheet.
But what's really happening here, in a nutshell, is that Chesapeake is replacing two smallish debts with one big debt.
2. A cash infusion
At the same time, StreetInsider.com reports that Barclays is upping its price target on Chesapeake Energy stock for a different, but related reason.
Chesapeake, you see, currently has $9.6 billion in debt on its books, against cash-in-hand of just $4 million. And seeing as the company has struggled to earn cash from its operations, with which to pay down debt, Chesapeake is instead selling off assets to raise the needed cash. "CHK has sold $1.2 billion in assets," says Barclays, "and [sales of] Haynesville [shale assets] could help it attain total proceeds of $2 billion or more."
That's money that Chesapeake can use to pay down a significant portion of its debt load.
3. And speaking of cash...
Selling assets to pay down debt is one thing. Paying to get rid of assets is something quite different -- but here, too, Barclays sees improved news for Chesapeake. According to the analyst, separate from asset sales in Haynesville, Chesapeake is paying $336 million "to exit the Barnett [shale] and cancel midstream contracts" it had previously signed.
While this will do nothing to lighten the company's debt load (actually, the opposite is true), Barclays thinks that exiting Barnett "will relieve CHK of substantial obligations and sharply boost near-term cash flow."
Final thing: Why cash is important
Data from S&P Global Market Intelligence show that Chesapeake Energy is currently burning cash at the rate of $2.1 billion annually. That's a huge improvement from the nearly $12 billion a year Chesapeake was burning through as recently as 2012. But it's not significantly different from the situation seen last year, when Chesapeake's free cash flow was negative $2.5 billion, or in 2014 (negative $2 billion), or 2013 (negative $3 billion), either.
Basically, as far as cash production goes, Chesapeake's efforts at a turnaround seem a bit stuck. If exiting the Barnett shale can push Chesapeake forward in the cash flow department, while selling off Haynesville assets can lighten its debt load (lowering cash drain from interest payments), well, then the analysts are right: These are positive developments. They do lessen the chance of bankruptcy. And they do also imply that Chesapeake shares may be worth a bit more this week than they were a week ago.
Is the news good enough to turn still profitless, still debt-laden, and still cash-burning Chesapeake Energy stock from a sell into a buy, though? The analysts still don't believe so -- and neither do I.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 301 out of more than 75,000 rated members.
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