Chesapeake Halts Dividend as Energy Slump Squeezes Cash Flow

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Chesapeake CEO Strives to End Cash Burn
Only twice in the past two decades has the second largest gas producer reported positive cash flow.

Chesapeake Energy Corp. halted its quarterly dividend for the first time in 14 years as slumping energy prices crimped cash flow for the second-largest U.S. natural gas producer. The shares dropped to a 12-year low.

Ending the 35-cent annual payout beginning with the third-quarter payment will save $240 million a year, Oklahoma City-based Chesapeake said Tuesday in a statement. The company will avoid another $75 million in annual preferred dividends by selling a portfolio of Oklahoma fields.

Chief Executive Officer Doug Lawler has been auctioning assets, cutting overhead and dismantling complicated financial commitments he inherited when he succeeded Chesapeake’s ousted co-founder Aubrey McClendon two years ago. Lawler’s goal of transforming Chesapeake into an international shale oil explorer has been stymied by the slump in commodity markets.

“More bold actions like this are needed,” Fadel Gheit, a New York-based analyst for Oppenheimer & Co., said Tuesday in a telephone interview. “He has to throw a lot of things overboard to save the ship.”

Lawler should have ended the dividend when he took over in 2013, said Gheit, who rates the stock at hold and owns none. Any negative investor reaction to the move probably will be offset by the positive impact on Chesapeake’s balance sheet, analysts at Tudor Pickering Holt & Co. said in a note to clients.

Chesapeake 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. Chesapeake has posted a cash shortfall in 22 of the past 24 years, according to data compiled by Bloomberg.

No Surprise

Chesapeake fell 9.5 percent to $9.29 at the close in New York, the lowest close since Aug. 5, 2003. The shares are down 65 percent in the past year.

The company’s $1.1 billion of 5.75 percent notes fell 1.5 cents to 86 cents on the dollar to yield 8.3 percent, after touching an all-time low of 84.88 cents, according to Trace, the price-reporting system of the Financial Industry Regulatory Authority.

“This decision is prudent,” Lawler said in the statement. “We continue to invest and redirect as much capital as possible into our world-class assets.”

The company has $2 billion in unrestricted cash and a $4 billion line of credit, Lawler said.

The suspension stops quarterly payouts that Chesapeake began in 2002. It’s the first time the company halted dividends since a previous energy market slump in 1998.

“This does not come as a surprise,” Scott Hanold, an analyst at RBC Capital Markets LLC, wrote in a note to clients Tuesday. “We view this as prudent to improve financial liquidity.”

Oklahoma Sales

The sale to FourPoint Energy LLC of almost all properties held by affiliate CHK Cleveland Tonkawa LLC will eliminate $75 million of preferred payouts, a 3.75 percent royalty payment on the properties and future drilling commitments, according to the statement.

FourPoint announced the purchase of Chesapeake Cleveland Tonkawa assets for $840 million on July 1. Adjacent properties will be sold for $90 million, according to Chesapeake.

The U.S. benchmark price for gas, which comprises 83 percent of Chesapeake’s output, tumbled 40 percent from a year earlier to a second-quarter average of $2.737 per million British thermal units.