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Chesapeake Energy Corporation Skyrocketed 67% in April, but It's Still on Thin Ice

By Sean Williams - May 9, 2016 at 9:39AM

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Chesapeake avoids a line of credit reduction in April, but pledges the metaphorical farm in return.


Image source: Chesapeake Energy.

What: Shares of Chesapeake Energy (CHKA.Q), a U.S.-based driller focused on producing oil, natural gas, and natural gas liquids, and the second-largest natural gas producer in the U.S., tore higher in April to the tune of 67% based on data provided by S&P Global Market Intelligence. The reason for Chesapeake's torrid ascent can be traced to a debt agreement worked out with its lenders on April 11.

So what: Chesapeake, like many of its exploration and production peers, expanded without much regard to cost when oil and natural gas prices were trading substantially higher than they are now. When prices fell, it crushed the heavily indebted Chesapeake as well as its peers. Even with Chesapeake shifting its production toward oil and away from natural gas there were no guarantees of success. But in order for Chesapeake to have any shot of long-term success, it needed to ensure that it maintained access to a $4 billion line of credit to give the company at least some level of flexibility. After practically pledging all of its metaphorical arms and legs as collateral, lenders agreed to let Chesapeake maintain its $4 billion line of credit on April 11.

Image source: Chesapeake Energy.

Under the terms of the agreement, Chesapeake pledged mortgages that account for 90% of all of the company's proved oil and gas properties – a fair security blanket for lenders considering Chesapeake's roughly $10 billion in net debt. Mind you, this $10 billion in net debt is more than three times Chesapeake's current market cap. In return, per Bloomberg, for a third revolving credit line negotiation in 16 months, Chesapeake convinced its lenders not to reevaluate its credit situation until June 2017. Traditionally these evaluations are done twice a year.

Adding a little icing on the cake for Chesapeake was a healthy rise in oil prices last month. Oil prices ended April nearly 20% higher from where they started, representing black gold's best month in a year.

Now what: Although Chesapeake's debt news was a nice surprise for investors who'd been expecting the worst – a handful of Chesapeake's peers have had their credit lines reduced by 20% or 30% -- the company is far from out of the woods.

As recently as last week Chesapeake Energy's stock was obliterated after reporting in-line first-quarter results. The company managed a 1% increase in production to 672,400 barrels of oil equivalent per day, but still witnessed a revenue decline of 39% and delivered a net loss of $964 million, or $1.44 per share.

More worrisome is Chesapeake's need to sell assets to reduce its debt levels. Chesapeake's Q1 report notes that the company is on track to divest $1.2 billion to $1.7 billion by the end of 2016, including its latest asset sale of acreage and producing properties in the STACK play of northern Oklahoma to Newfield Exploration. While it's good to see Chesapeake proactively working to bring its debt to manageable levels, it's disturbing for investors that this has been an ongoing dilemma for years, and that asset sales really aren't a decision so much as a necessity for its long-term survival and flexibility at this point.

Until we see measurable improvements in debt reductions, along with stabilizing cash flow and profits, I'd suggest keeping a safe distance away from Chesapeake Energy.

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