Shares of oil and gas producer Chesapeake Energy (CHKA.Q) are up 14.8% as of 11:30 a.m. EST today. While today's oil price surge is likely playing a large part in today's climb, Chesapeake's pronounced move comes on the heels of several debt deal announcements.
We could simply chalk up today's double-digit surge to the fact that a barrel of West Texas Intermediate is up 4.2% to $58.47 at the time of this writing, but Chesapeake's move is more pronounced than those of most other oil and gas producers that are focused wholly on U.S. shale drilling and fracking.
Prior to market opening, the company made several announcements related to financial moves it was executing. There are a lot of moving parts, but the big themes are that it issued a 4.5-year term loan for $1.5 billion to pay off some debts related to a subsidiary it acquired in the WildHorse Resource Development deal last year. It also issued $1.5 billion in new debt in order to repay some of its outstanding notes.
The goal of these moves was to push its debt maturities further down the road, but the cost to do that was quite high. To refinance its own debt, it had to issue second-lien secured notes with a coupon rate of 11.5% due 2025. Second-lien means they are behind other senior notes to get paid in bankruptcy, and secured means the company had to post collateral (likely some of its holdings). This means that those entities financing Chesapeake don't have a lot of faith in it repaying this loan in full.
This deal certainly buys management some time to cut costs and hopefully see a day when oil prices are high enough to make a return on its production. The trouble is that it is paying a hefty price for that extra time. A company issuing debt with terms like these means it is in some deep financial trouble, and investors are better off staying as far away as possible.