Chesapeake Energy's (CHKA.Q) stock has tumbled in recent weeks after the company warned that it might not be able to continue as a going concern. That's because persistently weak oil and gas prices are making it hard for the company to support its $9.7 billion debt load. If it can't keep up, then it might need to declare bankruptcy.
However, the energy company is working on a solution that could enable it to pay off a meaningful chunk of that debt. According to a report by Reuters, it's in advanced talks to sell its assets in the Haynesville shale to Comstock Resources (CRK), which boasts Dallas Cowboys owner Jerry Jones as a major investor. It's his deep pockets that could be the key to making this deal a reality.
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The bank of Jerry Jones
In August of last year, Jerry Jones sold his oil-producing properties in the Bakken Shale of North Dakota to Comstock in a deal valuing the assets at $620 million. However, instead of paying cash, Comstock issued 88.6 million new shares to Jones, giving him an 84% stake in the company. He has since helped Comstock grow its oil and gas operations by providing it with funds to also acquire Covey Park Energy. Jones agreed to invest another $475 million into Comstock to facilitate that transaction, which transformed it into the largest producer in the Haynesville shale.
Jones also made it clear that he would continue to support Comstock's growth. He told the company's management that he could potentially invest another $1.1 billion "when the right opportunity presents itself." Given Chesapeake's precarious situation, it seems as though one might be ripe for the taking.
A big hill to climb
Chesapeake has long been a leader in the Haynesville shale as it helped put that gas-rich shale region on the map in 2008. However, plunging gas prices and Chesapeake's mounting debt have forced the company to cut back in the region over the years. While it did complete a few wells in the area this year, it recently stopped drilling there as part of its plan to shift activity to higher-returning areas in 2020 to shore up its weakening financial position.
One of the biggest concerns is how the company will manage its near-term debt maturities. Chesapeake has $301 million in debt that will mature next year and another $294 million due in 2021. In addition to that, it owes $900 million on a bank credit facility that matures next year. That's a significant amount of debt that it needs to deal with over the next two years. The company doesn't have many options to address this debt since it continues to outspend cash flow on drilling new wells. Meanwhile, its plunging stock price has made it even more costly to complete additional debt exchanges.
Because of those issues, one of the company's few remaining options is to sell more assets. The Haynesville shale seems to be next in line. According to Reuters, the company is discussing a sale to Comstock that could fetch more than $1 billion. That valuation would provide Chesapeake with the lifeline it needs to address most of its near-term debt maturities. It would also buy it a bit more time to seek additional ways to whittle down the rest of its massive debt load.
Desperate times
Chesapeake Energy's stock has been in a free-fall since it warned that it might not be able to remain in compliance with its debt covenants if oil and gas prices remain weak. However, the company might get the lifeline it needs to stay afloat from the Jerry Jones-backed Comstock Resources. At the reported $1 billion-plus price, it would have most of the cash it needs to address its most pressing debt maturities. Though it's still just a fraction of what it owes overall, so the company would remain a long way from being back on solid ground.
