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Cracked

05 November 2019 by jbchevrel

Chesapeake Energy Corp. (CHK) is exploring & producing oil and natural gas onshore in the US. They got E&P assets in Appalachia, the Mid-Continent, the Barnett, Bossier, and Haynesville shale plays, and the Rockies. Its 5y CDS clearly underperformed the US HY CDS space today, the spread is 6 points wider, closing at 37 in our European close. It is now the 6th widest constituent in the CDX HY. That move came after CHK warned there is substantial doubt about its solvency, stating that depressed natural gas & oil prices may affects their ability to comply with leverage ratios in debt covenants, over the next 12 months. “which raises substantial doubt about our ability to continue as a going concern” quarterly filing said. CHK maintained a revenue stable from a year ago (~$1.2B) but posted a bigger-than-expected loss in Q3, net -$61m. they had lost net -$145m in Q3-18. Against this backdrop, CHK’s spending outlook for 2020 was cut by almost 1/3 to handle debt and generate free cash flow, but that wasn’t enough to appease sentiment here. That move in CDS reflects the move in cash, where 8% 25s and 8% 27s dropped by -6 points and -8 points, respectively. That was the largest daily move on record in cash. As I write the stock has lost -15% on the day, leaving the market cap around $2.6B. A decade ago, CHK market cap was $37.5B, before years of lower gas prices. The founder, Mr McClendon, was indicted in 2016 by a federal grand jury on charges of conspiring to rig bids for the purchase of leases. A day later, he was dead after his car collided with a highway overpass. Since then, CHK has been selling assets, cutting jobs and trying to produce more. Not only the latter is not on the agenda (CHK predicted flat oil output for 2019), the co. struggles to prove that it can achieve to be FCF positive. Shale gas production has been driving the world natural gas production growth for years, ending up decimating prices to ~ consistently sub-$3/mbtu levels over the past 3 years. CHK continues to look at asset sales, deleveraging acquisitions and capital funding options. CHK’s debt totalled $9.7B as of Sept. 30, up from $8.2B at the end of 2018.