Chesapeake Energy: Things Go From Bad to Worse for CHK Stock

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Everyone loves a good turnaround play. The unfortunate thing for natural gas superstar Chesapeake Energy (CHK), however, is that a turnaround continues to be elusive.

Chesapeake Energy: Things Go From Bad To Worse For CHK StockThe story of CHK is a tale written with high debt and cratering natural gas prices.

And just when it seemed that Chesapeake had its act together, the bottom dropped out even further — so much so, that there may only be one or two possible outcomes for the fracking pioneer. Neither of them is necessarily good for long term shareholders.

Things are certainly going from bad to worse at Chesapeake.

CHK’s Turnaround Flounders

Many of Chesapeake’s current problems still stem from how former CEO Aubrey McClendon ran the natural gas superstar.

And how did McClendon run CHK? In one word — debt. Lots of debt.

In an effort to grow Chesapeake to its massive size, McClendon used tons of debt, backroom deals and special financing vehicles to purchase acreage and assets in North America’s hottest shale formations.

At its peak, CHK actually had more debt on its balance sheet than major integrated oil giant Exxon (XOM).

That was all well and good when natural gas was $15 per MMBtu. However, with natural gas sitting at around $2.59 per MMBtu, it hasn’t been so spectacular for the energy stock … or its bondholders.

Liquidity concerns continue to plague CHK, and in order to deal with those concerns, Chesapeake has undergone some substantial asset sales. Everything from shale fields to midstream assets have been sold off as way to pay down its hefty debt load and raise cash. This even included spinning off its oil services division as Seventy Seven Energy (SSE) as a way to reduce costs and cut about $1 billion in debt from its balance sheet.

These asset sale efforts plus spending some capex cash on reducing exposure to dry gas and boosting its production of wet gas, natural gas liquids and crude oil seemed to work for a while. CHK’s turnaround was at hand. Heck, Chesapeake even managed to produce a profitable quarter late last year — something it hadn’t done in quite some time leading up to that point.

And then OPEC decided to keep drilling and the current downward trend in oil prices took hold. Basically, everything Chesapeake did was for naught.

Which brings us to today. So far this year, in its efforts to stay relevant, CHK has reduced its capex, increased the pace of asset sales, cut its dividend and now is reducing headcount. Chesapeake announced that it has laid off about 15% of its workforce, with the bulk of those positions coming from its corporate headquarters in Oklahoma.

Still Major Problems at CHK

“Lower for Longer” prices for natural gas and crude oil have caused CHK’s debt issues to come right back to the forefront. Chesapeake’s balance sheet is still in pretty bad shape — the company currently has about $18 billion in long-term debt and other liabilities hanging around its neck.

Meanwhile, those lower commodities prices are forcing CHK to burn through cash at a pretty quick pace. To keep drilling — even with reduced capex rates — analysts at Sterne, Agee & Leach estimate that Chesapeake should have about $2 billion in negative cash flows this year. That estimate echoes similar predictions from analysts at SunTrust.

That means the fracker could need to tap its roughly $2 billion in cash holdings and its $4 billion credit line to keep its just-OK production humming. Tapping additional debt would just put it further into the hole it has been trying to dig itself out of.

Also helping burn that cash are several midstream contracts that CHK has had in place since McClendon was in charge. In order to avoid mega-sized penalties, CHK is required to keep pumping certain volumes of natural gas — even if prices make it unprofitable to do. Barclay’s estimates that these tough contracts have suppressed cash flows enough in this price environment that investors should start to getting concerned.

In fact, Barclay’s thinks the problems with cash flow burn, debt and lower commodities prices are severe enough to warrant a $5 price target.

Bottom Line

Given the mounting problems at Chesapeake, there may be only two real ways out.

One would be filing for bankruptcy. This scenario isn’t an immediate risk, as the firm does have a few lifelines left in terms of liquidity. However, that cash burn problem is very real and CHK stock is finally hitting the bottom of the barrel in terms of assets it can or wants to sell. There’s no more “junk.” The recent layoffs kind of confirm that. We’re now looking at core assets. And once it sells those, you’ll see production declines — the kind of declines that would crimp cash flows and bring us full circle. So bankruptcy is something investor’s need to consider.

Secondly, a buyout of the firm could come soon. Chesapeake’s market cap is only around $4.5 billion. Even when adding debt, you’re still looking at under $25 billion for some really prime natural gas assets in the Marcellus, Utica and other shales. Any firm looking to get a foothold in these regions or boost their own acreage could be looking at CHK as a buyout bait … not that this will matter to long-suffering shareholders. It’ll only help lock in the losses.

At the end of the day, CHK stock is a basket case — one that investors should leave alone.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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Aaron Levitt is an investment journalist living in Ohio. With nearly two decades of experience, his work appears in several high-profile publications in both print and on the web. Also likes a good Reuben sandwich. Follow his picks and pans on Twitter at @AaronLevitt.


Article printed from InvestorPlace Media, https://investorplace.com/2015/09/chk-chesapeake-energy-job-cuts/.

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