By Allison McNeely
The company’s shares and bonds gained Wednesday after it said lenders agreed to loosen some restrictions on its ability to incur debt, clearing up a prior “going concern” issue. Chesapeake also announced it was securing an additional $1.5 billion loan package from a group of banks, as well as plans to buy back $700 million of notes due in 2025 at discounted prices and swap other bonds into new securities.
The company’s financing proposals could reduce leverage from its current level of around 4 times a measure of earnings and trim its overall debt load. Yet it doesn’t change the fundamental trajectory for the Oklahoma City-based energy producer, which has struggled to generate positive cash flow in recent years as weak oil and gas prices cast a pall over America’s shale boom, according to James Spicer at TD Securities.
“I’m not sure that it solves their problems,” said Spicer, a high-yield analyst focused on the energy sector. “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.”
Chesapeake didn’t respond to a request for comment.
The company’s bonds had extended losses since the driller warned last month that its financial survival was in doubt. Its fortunes rose during the boom years under Aubrey McClendon, when it became the second-largest U.S producer of natural gas. But Chesapeake was brought down by years of low prices as the market was flooded with new supply.
The company needs oil prices around $60 a barrel and natural gas prices around $2.75 MMBtu in order to maintain production and generate free cash flow, Spencer Cutter, a Bloomberg Intelligence energy analyst, said in an interview. They were trading at around $58 a barrel and $2.38 MMBtu respectively on Wednesday.
“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,” Cutter said.
JPMorgan Chase & Co., Morgan Stanley, Bank of America Corp. and a unit of Mitsubishi UFJ Financial Group Inc. are arranging the new secured loan, the company said in statement Wednesday. The cash will be used to fund debt buybacks and to retire an existing revolving credit line. The plan still needs lenders to commit to the deal, negotiations of definitive terms and consent from existing creditors, Chesapeake said.
In a separate statement, it offered a debt swap on five sets of notes at deeply discounted prices, with holders getting as little as 57 cents on the dollar. The exchange could involve as much as $2.34 billion of securities.
Participating bondholders will get new secured debt in exchange for their unsecured bonds, as well as a coupon boost from between 7% and 8% to 11.5%. The securities will sit behind the new term loan in the capital structure, Cutter said.
Chesapeake is also offering up to 97 cents on the dollar in cash for another set of senior notes due in 2025.
Notably, the company is leaving its near-term bonds in place for now, suggesting that it may be confident about other methods for addressing those maturities, such as through an asset sale, Spicer said.
Chesapeake creditors will now have access to the Brazos Valley assets –which it acquired through a merger with WildHorse Resource Development — in the event of a restructuring, Cutter said. Previously, Brazos lenders and bondholders would have been repaid from those assets before Chesapeake creditors.
“Chesapeake expects these transactions to improve its financial flexibility, as they will allow Brazos Valley and its subsidiaries to support Chesapeake’s current and future debt,” the company said in a statement.
Chesapeake’s efforts to swap its debt are just the latest actions taken to shore up the business since McClendon’s 2016 death. In addition to selling assets, cutting jobs and trying to boost output, the company has undertaken a series of debt-for-equity swaps, the most recent in September.
Its efforts to delay repaying debt are fairly similar to moves made by other distressed energy companies following the sector’s downturn in the middle of the decade, according to Cutter.
“The vast majority of those companies ended up going bankrupt anyway,” he said.