To put it bluntly, Chesapeake Energy (NYSE:CHK) had an atrocious year. Some of that was commodity-price driven and some was from its own missteps. Either way, it led to some pretty bad headlines for the company. Here's a look back at some of the worst headlines this year.
1. "Chesapeake Energy Posts Big Loss, High Cash Burn, Amid Oil Slump" --Forbes
Chesapeake Energy's first quarter report in early May really showed how tough things were getting for the company. It reported a gargantuan $3.8 billion loss due to a massive $5 billion writedown resulting from the impaired value of the company's oil and gas assets amid weak commodity prices. That said, the loss was noncash, with the company actually reporting a small operating profit.
That profit, however, was a bit deceiving because the company was burning through cash after spending heavily on new oil and gas wells that quarter. In fact, it burned through $1.47 billion in cash that quarter, up from $1 billion in the prior quarter. It's that cash burn that really started to worry investors as the year went on and its cash pile dwindled.
2. "Chesapeake Energy Bond Payout Raised to $438.7 Million" --Reuters
In 2013, Chesapeake Energy redeemed $1.3 billion of its bonds due in 2019 at par because it could issue new notes at an even cheaper rate. While it seemed like a good move at the time, the company actually waited too long to make the redemption penalty-free. Bondholders took the company to court and this year the court ruled in favor of those bondholders.
As a result, Chesapeake Energy was forced to pay them the entire interest they would have earned on the bonds plus a penalty. This added up to $438.7 million in additional costs for buying back these bonds. In other words, instead of saving a little bit on the interest differential, the company ended up paying up for its botched buyback. This was cash the company really could use right now, especially with as much as it burned through this year due to weak commodity prices.
3. "Chesapeake Investors Seen Signaling Surrender as Bonds Plunge" --Bloomberg
Because commodity prices continue to weaken and the company's cash pile is dwindling, Chesapeake Energy's bond investors started to grow increasingly concerned with the company's ability to repay its more than $11 billion in debt. This led to a significant sell-off in its bonds, which was a sign that the company was viewed by the market as being financially distressed.
With its bond prices falling, the company took steps to address the situation by announcing a note exchange offer to issue new second-lien notes in exchange for a portion of its outstanding notes. The company's primary purpose was to buy back notes nearing maturity at a price close to par, with the company offering much less for notes maturing at later dates. The exchange, however, hasn't been viewed favorably by investors or analysts, with one analyst saying that it "fails miserably" in easing the company's short-term liquidity concerns.
All that being said, this isn't a move that was unique to the company with a number of companies, including California Resources (NYSE:CRC), having engaged in similar exchanges. That said, like Chesapeake Energy, California Resources' exchange has been viewed by the market as a sign of distress, which is evident by the fact that California Resources paid dearly to complete its exchange. The company exchanged $2.8 billion of debt, but only reduced its net debt by $563 million and yet it's paying $21 million more per year in interest expense. While the haircut on the debt might help, the higher interest payments only make its cash flow concerns worse.
Weak oil and gas prices are only partially to blame for Chesapeake's bad year. The company made a number of missteps both this year and in past years that really torpedoed the company's ability to manage when conditions grew worse. That led to some pretty bad headlines and unfortunately there might be a few more bad headlines in the company's future. That's because it still hasn't fully addressed its debt situation, which is leading to real concerns that it might not make it through this downturn.