Shares of Chesapeake Energy (NYSE:CHK) have been under pressure this year as there has been increased talk of bankruptcy. The stock is currently trading at 58 cents per share due to low natural gas prices, an oversupply of natural gas and the risk of bankruptcy.
In cases like that of Chesapeake stock, the first course of action I take is to examine how the bonds are trading. Bonds with maturity in August 2020 are trading at roughly 90 cents on the dollar. To me, this is a positive sign. If there was a realistic chance of a Chesapeake bankruptcy occurring prior to August 2020, these prices would likely be at or below 50 cents on the dollar.
Another item I examined was the recent selloff in bonds compared to the energy selloff in 2015-2016. The 2021 bonds for Chesapeake traded all the way down to around 13 cents on the dollar back during the energy selloff. The recent drop in the price of the bonds is nowhere near the low levels seen in 2015-2016.
Debt Maturity Schedule
The next step in solving the debt puzzle is examining when the debt is coming due. According to Chesapeake’s third-quarter investor presentation, the company should be able to manage bond maturities over the next few years. Things become more questionable in 2025-2027 when there are substantial debt maturities. You get a clear sense of the risk when you see bond prices at 50 cents during that two-year period.
Preferred Stock and Asset Sale
Investors should also consider the preferred shares of Chesapeake stock. As I noted above, bond prices are higher now than they were during 2015-2016. Another indicator that the company is less stressed now than during 2015-2016 is the fact that Chesapeake Energy has not cut its preferred stock’s dividends. Back in 2016, the company stopped paying dividends on preferred stock. However, it has not done so now, at least not yet. If the company continues paying the preferred dividends, it could be a sign things are not as bad as the market is saying.
Want something else to consider? CHK does have assets it can sell to help alleviate its debt burden. Recently, Reuter’s reported on the possibility of Chesapeake selling its Haynesville shale assets in Louisiana. Such a sale allegedly comes with a price tag near $1 billion, which would certainly be a big help in lowering Chesapeake’s debt.
The Bottom Line on Chesapeake Energy
The bottom line for Chesapeake Energy is it appears the company can handle its debt maturities over the next couple of years. There are many wildcards though that could have an impact, like continued low natural gas prices and continued oversupply. In addition, there is the 2020 election, and the election of a Democratic candidate could cause a shift in energy policy, which could be a negative for CHK.
When looking at the long-term bond price table, the market is clearly pricing in trouble for Chesapeake in 2025-2027. Based on all the data I have examined, investors can find the best value in Chesapeake bonds that will mature before 2025. Another option would be to invest in one of the Chesapeake preferred stock issues, assuming the preferred payments stay in place.
As of this writing, Brad Kenagy did not hold any of the aforementioned securities.