Chesapeake Suspends Preferred Dividend as Natural Gas Lags

  • Company will save about $170 million a year and will buy debt
  • Shares rose by as much as 17 percent, most since August

Chesapeake Energy Corp. said it’s suspending payments on preferred stock dividends to free up cash for paying down debt, a move one analyst described as “survival 101” amid sagging natural gas prices.

The move will save Chesapeake about $170 million a year, the Oklahoma City-based company said in a statement Friday. Chesapeake halted its quarterly common stock dividend in July for the first time in 14 years.

"It is all about cash now," Subash Chandra, managing director of Guggenheim Securities, said in an e-mail Friday. "Operators are reducing any outflows they can to keep production from collapsing. Debt service will be prioritized for secured debt at the expense of others. It is survival 101."

Chesapeake, which pumps more U.S. gas than any explorer other than Exxon Mobil Corp., is buying back debt while it’s trading for as little as 29 cents on the dollar, a cheap way to whittle a $9.8 billion debt load that is four times the company’s market valuation.

Shares rose by as much as 17 percent in New York, the most since August, before closing 1.1 percent lower at $3.51 on Friday. Chesapeake has lost about 80 percent of its value in the past year.

“Given the current commodity price environment for oil, natural gas and natural gas liquids, we believe that redirecting this cash toward debt retirement provides better returns for the company," Chief Executive Officer Doug Lawler said in the statement.

The company’s 5.75 percent perpetual convertible preferred securities fell 4.4 percent to $172, boosting the yield to about 39 percent. The biggest owners of the notes were Mackenzie Financial Corp. and Harris Associates LP as of Oct. 31.

Harris Associates declined to comment and owners of the notes at Mackenzie did not immediately return calls for comment.

Chesapeake is among oil and gas producers that have cut dividends to conserve cash as fuel prices lag. U.S. benchmark gas futures have traded below $3 per million British thermal units since May, compared with the $3.927 average since April 1990. This week, oil traded below $30 a barrel for the first time in more than a decade.

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