Chesapeake Debt-for-Equity Swap Signals Darkest Days May Be Over

  • Shale driller has more than doubled since touching 17-year low
  • Gas giant still facing ‘tsunami’ of debt maturities: analyst

Chesapeake Energy Corp. investors’ willingness to trade bonds for shares that scraped a 17-year low just three months ago indicates waning concern about the shale driller’s ability to survive.

In the latest move to lighten a debt load that’s three times its market value, Chesapeake exchanged 28 million new shares for bonds with a face value of $153 million, the Oklahoma City-based company said in a regulatory filing on Thursday. That followed almost $100 million in open-market purchases of its own debt at deep discounts since late 2015 and a previous notes-for-equity swap in March.

As recently as February, Chesapeake shares were trading for $1.50 -- a level not seen since 1999 -- amid investor concern the second-largest U.S. gas producer couldn’t afford a $500 million debt payment the next month. The company’s credit rating plunged deeper into junk and pipeline operators began demanding collateral to ensure bills got paid. The stock has since rebounded as Chief Executive Officer Doug Lawler defused the liquidity crises with spending cuts and larger-than-expected asset sales.

“This confirms that people think the company is going to be around for a few more years,” said Tim Rezvan, an analyst at Sterne Agee & Leach Inc. in New York. “People feel like that have some running room. They’ve been able to deliver on asset sales and they’ve got a lot more levers to pull.”

Chesapeake dropped as much as 6.4 percent and closed at $4.17 on Thursday, the day the debt-for-equity swap was announced. Its share price is down 73 percent in the past year but is still more than double the 17-year low touched in February.

Gordon Pennoyer, a Chesapeake spokesman, declined to comment beyond the filing.

Debt Overhang

"The company still has a sizable debt overhang," John Freeman, an analyst at Raymond James, wrote Thursday in a note to investors. "Thus we would expect a lot more financing maneuvers in the future."

Chesapeake has been cutting jobs, selling drilling rights and shrinking capital spending to conserve cash amid a glut-driven collapse in North American energy prices. Last month, the company pledged “substantially all” of its gas fields, office buildings and derivatives contracts to maintain access to a $4 billion line of credit. Chief Financial Officer Domenic Dell’Osso has said more secured debt may be sold to raise cash; last week, Chesapeake posted its fifth straight quarterly loss, the longest losing streak since its 1993 debut as a publicly-traded company.

There have not been many debt-for-equity swaps so far during this downturn, Spencer Cutter, an analyst at Bloomberg Intelligence, said Thursday in an electronic message. They have mostly been unsecured debt traded for secured notes, he said.

Chesapeake will need to continue finding buyers for its gas fields and other assets up for sale to cover its debts while it waits for natural gas markets to rally, Rezvan said. Almost half of the company’s $9.5 billion in debt comes due in the next five years, Bloomberg data show.

“There is a tsunami of debt coming due in the next few years,” Rezvan said.

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