If there’s a company more deserving of being put out of its misery than Chesapeake Energy (NYSE:CHK), I’d like to know about it. CHK stock is now trading below $1, its lowest level since February 1999.
On Dec. 4, Chesapeake was thrown a lifeline getting a $1.5 billion loan from a group of banks that keeps the bankruptcy wolves from the door. For now.
Chesapeake Energy is in an incredibly fragile state. Uncooperative oil and gas prices will most certainly be the end of the company, effectively rendering Chesapeake Energy stock worthless.
Frankly, I’m more confident of Jesus’ second coming than I am the resurrection of the CHK stock price. At this point, anyone still holding Chesapeake stock is either an insider or employee, a massive risk-taker, or wildly delusional. Any way you slice it, Chesapeake Energy is dead on arrival.
The Devil Is in the Details
On Dec. 10, Chesapeake announced that its $1.5 billion term loan would close Dec. 23. The loan comes with a 4.5-year term and an interest rate of LIBOR plus 8%, which translates to slightly more than 10% interest.
The key for Chesapeake is it allows the company to consolidate the debt from its Brazos Valley Longhorn LLC subsidiary with the rest of the business.
“We are very pleased to have the financing in place to eliminate Brazos Valley’s separate capital structure. Combining into a single financing structure increases our flexibility, enhances our credit profile and improves our ability to continue to meet our financial obligations as we focus on reducing debt, improving our cost structure and positioning the company to deliver increased shareholder returns,” Lawler stated in Chesapeake’s press release.
While the move gives Chesapeake a little breathing room — Brazos Valley’s current debt was $900 million at the end of September out of a borrowing base of $1.3 billion and $2 billion in total commitments — the senior notes charged 6.875% and were due in 2025.
I’m not a debt expert, but it would seem that 6.875% is better than LIBOR plus 8%.
Sure, Chesapeake gets to add $2 billion to its debt ceiling while adding approximately $800 million in cash after accounting for the paydown of $700 million in senior notes. However, it will still have more than $10 billion in total long-term debt after the $1.5 billion term loan.
“This helps from a leverage standpoint, but it doesn’t change the fundamental issue that many oil and gas producers in North America face: the economics of fracking are questionable,” Bloomberg Intelligence energy analyst Spencer Cutter stated on the news.
For now, let’s assume leverage goes down. It’s still got a significant problem.
For CHK Stock It All Comes Back to Free Cash Flow
I have said it several times in the past couple of years. Free cash flow is the key to Chesapeake’s resurrection. While CEO Doug Lawler talks a good game, he continues to fail to live up to his promises of positive free cash flow.
To be fair to the beleaguered CEO, I’d settle for free cash flow neutrality. Even that seems too distant at the moment.
“I’m not sure that it solves their problems,” said TD Securities high-yield energy analyst James Spicer. “The underlying issue is generating free cash flow. The company is saying it can, but I think it’s very much a show-me story for investors.”
Lawler has been selling free cash flow neutrality since 2017, when he based his assumptions on a $50 barrel and $3 per MCF. Right now, they’re at $58 and $2.38, and Chesapeake still can’t thread the needle.
My InvestorPlace colleague Josh Enomoto stated recently, “the debt financing arrangement makes CHK stock genuinely appealing to contrarians because a recovery pathway has opened.”
While I respect his opinion, I think you’d be crazy to chase this stock at the moment. Except for the most speculative investors, this is a company ready to implode.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
