Chesapeake Pledges Almost Everything It Owns to Secure Debtby
Shale gas driller may be entering `end game': analyst
Chesapeake's stock surges most in S&P 500 after announcement
Chesapeake Energy Corp. pledged “substantially all” of its gas fields, office buildings and derivatives contracts to maintain access to a $4 billion credit line as the shale driller grapples with falling energy prices. The shares surged the most since their debut 23 years ago.
Chesapeake renegotiated a revolving credit agreement for the third time in 16 months and convinced lenders to postpone the next evaluation until June 2017, the Oklahoma City-based company said in a statement Monday. Such reassessments normally occur twice a year. In exchange, Chesapeake pledged almost everything it owns, “including mortgages encumbering 90 percent of all the company’s proved oil and gas properties” as collateral, according to a separate regulatory filing on Monday.
Chesapeake’s stock and bonds have been battered amid investor concern over the second-largest U.S. gas driller’s ability to shoulder a debt load twice the size of its market value. The company has slashed its obligations by more than half a billion dollars since the end of September, and raised twice as much cash as expected from fourth-quarter auctions of gas fields across several states.
At the same time, Chief Executive Officer Doug Lawler has taken advantage of the slide in the company’s own bond prices to snatch up the debt at steep discounts and last month exchanged 17.26 million new shares for about $73 million in senior notes. Even so, the company has more than $9 billion in debt, 12 of its 19 bonds trade at distressed levels and U.S. gas prices recently touched a 17-year low, according to data compiled by Bloomberg.
“They can continue as a going concern and don’t have to worry about an immediate credit event,” said Robbert Van Batenberg, an analyst at Flow Traders US LLC in New York. “But once you get to that point, it tends to be kind of the end game.”
Chesapeake, second only to Exxon Mobil Corp. in gas production from U.S. fields, bucked the trend among fellow American explorers that have seen their credit lines snipped in the face of crashing commodity markets and crippling debt loads. Citigroup Inc. credit analysts led by Marisa Moss had expected Chesapeake’s borrowing line to be cut by 20 percent. Drillers from Bill Barrett Corp. to EV Energy Partners LP have disclosed credit line reductions approaching 30 percent.
Chesapeake rose 34 percent to $6.05 on Tuesday in New York, the largest daily advance for the shares since the company’s initial public offering in February 1993. The stock was the biggest gainer in the Standard & Poor’s 500 Index on Tuesday, rising more than twice as much as the next-best performer. Over the past two trading sessions, Chesapeake added $1.56 billion to its market valuation. Last year, the shares tumbled 77 percent for the worst annual performance since 1998.
Investors should hold onto their Chesapeake stock, analysts at Tudor Pickering Holt & Co. said in a note to clients on Tuesday, revising their previous recommendation to sell the shares. The Houston-based brokerage and investment bank cited the “constructive” nature of Chesapeake’s credit amendment and fading negative sentiment toward the driller.
Chesapeake’s $1.1 billion of 5.75 percent notes maturing in March 2023 jumped 6.5 cents to 44 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Most of the companies bonds traded for less than 60 cents on the dollar, a level that Bloomberg Intelligence analyst Spencer Cutter said typically indicates investors expect a restructuring.
Chesapeake’s main focus is 2017 and 2018 “maturity management,” Lawler said in a presentation to analysts last month. The company lost about $40 million a day in 2015 and is expected to end this year in the red as well, based on the average estimate of 14 analysts in a Bloomberg survey.
The amendment to the revolver will provide Chesapeake “time to ride out a low commodity price environment,” Citigroup’s Moss said in a note to clients on Monday. The company probably will issue a secured, first-lien term loan to retire its remaining 2017 and 2018 bonds, she said.
In addition to most of its gas and oil reserves, Chesapeake pledged as collateral all hedge contracts, property, deposit accounts and securities, subject to certain undisclosed carve-outs, according to the regulatory filing.
The amendment includes a collateral value coverage test, which Chesapeake said may limit its ability to tap the credit line. The revision also provides temporary covenant relief, with a key measure of indebtedness suspended until September 2017. During the grace period, Chesapeake promised to maintain minimum liquidity of $500 million. Chesapeake also maintains the right to incur as much as $2.5 billion of first lien indebtedness.