Chesapeake Soars Most in S&P 500 on Pledge to Lower Debt Load

  • Company sold $700 million in assets vs. planned $300 million
  • 2016 budget of $1.3-$1.8 billion 57% less than last year

Chesapeake Surges on Pledge to Lower Debt Load

Chesapeake Energy Corp. surged 23 percent after saying it will pay off the remainder of a half-billion dollar debt that’s coming due in three weeks with proceeds from asset sales that were twice as large as the company expected.

Chesapeake has signed agreements to divest $700 million in gas fields and other assets, overshooting the $200 million to $300 million target communicated to investors as recently as Dec. 16, the Oklahoma City-based shale driller said in a statement on Wednesday. The company plans to sell another $500 million to $1 billion in properties this year while shutting down at least half the drilling rigs it has under contract.

Stung by plunging natural gas prices, Chesapeake took advantage of investor concern about its ability to cover debts by purchasing at discounted rates about $240 million of the 3.25 percent senior notes due next month, according to the statement. The company has also been buying up bonds that mature in 2017 for 45 percent less than their face value, further reducing future demands on its cash flow.

2016 Priorities

Chesapeake’s “tactical focus areas” for the year include selling assets to raise cash and repurchasing bonds, Chief Executive Officer Doug Lawler said in the statement. About 70 percent of capital spending will be invested in finishing already-drilled wells rather than starting new ones, he said -- a less expensive way to sustain output.

Shares jumped to $2.53 as of 11:36 a.m. in New York and are up 27 percent this week. After closing out 2015 as the year’s worst performer in the Standard & Poor’s 500 index, Chesapeake led the index on Wednesday.

The 3.25 percent bonds maturing next month rose 3.5 percent to 99.1 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Chesapeake, which pumps more gas than any U.S. producer except Exxon Mobil Corp., has been shrinking its workforce, restructuring debt, closing offices and selling parts of its portfolio to raise cash. The asset sales announced on Wednesday may ease concern among bondholders and analysts about Chesapeake’s ability to manage a debt burden described earlier this month by Standard & Poor’s as “unsustainable.”

Smaller Deals

The deals being negotiated now range in sizes from $10 million to $500 million each, Lawler said during a conference call with analysts and investors Wednesday. Sales in the $1 billion or more range are rare in the current market environment, he said.

Lawler irked some observers by ending the conference call after about 30 minutes, half the length of a typical Chesapeake quarterly earnings call. Tim Rezvan, an analyst at Sterne Agee & Leach Inc., said that by “abruptly” terminating the call, the company left unanswered questions about pipeline commitments, unfinished wells, hedging activity and financial assumptions underlying its reserves data.

Chesapeake swung to a fourth-quarter net loss of $2.2 billion, or $3.36 a share, compared with a profit of $639 million, or 81 cents, a year earlier, according to the statement. The results were on target with the expected per-share loss of 16 cents based on the average estimate of 29 analysts in a Bloomberg survey.

Asset Writedowns

The precipitous decline in energy prices prompted the company to write down $2.83 billion in the value of gas fields and other assets during the fourth quarter, bringing Chesapeake’s full-year writedowns to $18.2 billion.

For all of 2015, Chesapeake posted a $14.7 billion loss, the deepest in company history.

The gas producer said it’s budgeting spending of $1.3 billion to $1.8 billion in 2016, 57% less than its spending last year. Chesapeake expects to reduce the number of drilling rigs working its fields to between four and seven this year, down from 14 in the fourth quarter. As recently as late 2014, the company had 67 rigs in operation.

In an about-face from former CEO Aubrey McClendon’s approach, Chesapeake said it locked in future prices for some of its gas at $2.84 per thousands cubic feet. A portion of its 2016 crude is hedged at $47.79 a barrel, a premium to the current U.S. oil price of around $32.

The stock fell as much as 51 percent on Feb. 8 to the lowest since it began trading in 1993 after a news report that Chesapeake hired restructuring attorneys; the company issued a statement that same day saying that it had no intention of filing for bankruptcy protection.

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