Chesapeake Dividend Cut Backfires for Bonds by Clouding View

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After keeping its investors in the dark for five weeks, Chesapeake Energy Corp. finally pulled the plug on its stock dividend. It turns out the waiting wasn’t the hardest part.

The energy producer’s debt lost about $263 million in market value Tuesday after the Oklahoma City-based company halted its quarterly payout, breaking a dividend string that began in 2002. Creditors may be unnerved about a cash balance that was lower than expected at the end of the second quarter, according to a report from Goldman Sachs Group Inc.

“There’s still a worry that they need to hunker down, and they’re doing this because the future is not all that good,” Phil Adams, a Chicago-based analyst at debt researcher Gimme Credit, said in a telephone interview. “The message being sent out is that the next six months are going to be equally as difficult as the last six months. Bondholders are saying ‘Whoa, if the company has to cancel the dividend, I guess maybe things are bad.’”

Chesapeake’s $1 billion of 6.125 percent notes that mature in February 2021 plunged 5.5 cents to 87.75 cents on the dollar to yield 9 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

‘Remain Skeptical’

“While a dividend cut is generally positive for credit, in this case we remain skeptical,” Goldman Sachs analysts led by Jason Gilbert wrote in the report.

The Goldman analysts asked why a company with almost $3 billion of cash and a $4 billion untapped credit line at the end of March would care so much about saving $240 million a year at the risk of upsetting equity holders. The company’s announcement suggests that it might not have been able to reduce expenditures as much as expected or that earnings will miss expectations or both, they wrote in the report.

Gordon Pennoyer, a Chesapeake spokesman, said Chief Executive Officer Doug Lawler was unavailable for an interview.

The company reported capital expenditures of $6.62 billion last year, and analysts forecasts compiled by Bloomberg are for the total to fall to $3.54 billion in 2015. That was projected to help limit the company’s cash burn to $1.33 billion, down from $1.98 billion last year.

Chesapeake, which typically announces a July 31 dividend payment around the middle of June, had remained mum on the status of the payout until Tuesday. The company is expected to post a net loss of $3.18 billion this year, based on the average of eight analysts’ estimates compiled by Bloomberg. That would be the company’s steepest annual loss since 2009.

Dividend Yield

Before the suspension, Chesapeake had an indicated dividend yield of 3.4 percent, based on Monday’s closing share price. That’s almost on par with Exxon Mobil Corp., the world’s largest energy producer by market value, and more than twice the rate of No. 3 U.S. gas supplier Anadarko Petroleum Corp.’s.

A gauge of the company’s credit risk has deteriorated to the worst level in almost three years. Credit-default swaps contracts linked to the company’s debt rose to 651 basis points, or more than twice the level at the start of the year, according to data provider CMA, which is owned by McGraw Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market. In that same period, the price of oil has remained relatively unchanged.

“Cutting the dividend may have prompted the bondholders to look under the hood and say, ’is something wrong with this company?’” James Sullivan, an analyst at Alembic Global Advisors in New York, said in an interview. “The rate of cash burn should be very concerning for a bondholder.”

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