What: Chesapeake Energy (NYSE:CHK) started November off on the right foot, but quickly stumbled and plunged more than 30% for the month. That's because investors looked past its income statement, instead focusing on the fact the company is burning through cash, which is putting even more pressure on its weak balance sheet.
So what: After reporting a smaller-than-expected third-quarter loss in early November, as well as reducing its full-year capex, the stock was up more than 6%. That enthusiasm, however, was short lived. Analysts instead focused their attention on the company's cash burn, with Citigroup noting that the company's cash balance at the end of the quarter was just $1.76 billion, which was under the $1.95 billion it had forecast.
The pressure on the company continued later that week after Fitch downgraded its debt from BB to BB-, which is another step below investment grade. It made the move because Chesapeake's cash flow, liquidity, and leverage will be "notably weaker" than previous expectations. This is due to the continued weakness of oil and gas prices, and the impact that will have on the company's cash flow and its ability to fetch a fair price on future asset sales.
A few days later Sterne Agee CRT piled on with a downgrade, reducing the stock from buy to neutral. It too is worried about low natural gas prices as well as the company's capital structure.
That balance sheet pressure worsened as the month wore on, with its bonds plunging to record lows. In fact, some of the company's near-term notes traded for as low as $0.70 on the dollar, while longer dated notes fell below $0.50 on the dollar, suggesting that credit investors don't think the company will be able to repay all its debt.
Now what: Investors are growing gravely concerned with Chesapeake's ability to manage its debt given the persistent weakness in oil and gas prices. While the company has recently offered to address some of its debt by exchanging unsecured notes for new, secured second lien notes, that has only exacerbated market fears because it is being viewed as a distressed exchange. It's a sign that the market is growing increasingly worried that if commodity prices don't rebound soon, then Chesapeake Energy might have to address its debt under bankruptcy protection.