CHK - Chesapeake Energy

[Picasso]

He's made several comments about it, I can't find them all but here's a couple:

 

http://video.cnbc.com/gallery/?video=3000348671

 

http://video.cnbc.com/gallery/?video=3000345052

 

In the second video he says he expects his oil stocks to go even lower and it would probably take a few years to work out.  These oil/gas investments of his were made before the short-term supply/demand imbalance became obvious.  His losses in Talisman were not that bad because someone purchased them early in that downturn. 

 

If you take his comments for what they're worth, he's highly likely to get involved in some distressed mid-quality oil/gas names.  Maybe that's still Chesapeake in one form or the other, who knows.

[tede02]

Great thanks. 

 

What's interesting to me is how basic the bets are on these energy companies.  One could spend an infinite amount of time studying financials, reading 10ks, etc., and yet the single most most influential factor is commodity prices.  Icahn said just as much in one of those videos.  I tend to agree with him that prices will come back.  But admitedly, I don't know when.  I keep buying a few names, including CHK, as the prices decline.  My strategy is to keep my overall exposure modest because without a doubt, a possible outcome is commodity prices go even lower and or stay depressed for an extended period wiping out many of these firms.  But my personal bet is there is a higher probabilty that prices recover in the coming 1-3 years.  It will be interesting to look back and see if my thought process was correct.  Best of luck to everyone who is dabbling in the space. 

 

On a side note, thanks to people like Wilson who have provided some great perspective on the workings of the industry.  It has certainly helped my learning curve. 

[TheAiGuy]

Great thanks. 

 

What's interesting to me is how basic the bets are on these energy companies.  One could spend an infinite amount of time studying financials, reading 10ks, etc., and yet the single most most influential factor is commodity prices.  Icahn said just as much in one of those videos.  I tend to agree with him that prices will come back.  But admitedly, I don't know when.  I keep buying a few names, including CHK, as the prices decline.  My strategy is to keep my overall exposure modest because without a doubt, a possible outcome is commodity prices go even lower and or stay depressed for an extended period wiping out many of these firms.  But my personal bet is there is a higher probabilty that prices recover in the coming 1-3 years.  It will be interesting to look back and see if my thought process was correct.  Best of luck to everyone who is dabbling in the space. 

 

On a side note, thanks to people like Wilson who have provided some great perspective on the workings of the industry.  It has certainly helped my learning curve.

 

If you want to bet that commodity prices rise, you might want to take a look at the debt of coal companies.

[argonaut]

http://www.wsj.com/articles/chesapeakes-boss-faces-tall-order-1448558312?alg=y

[Jurgis]

If you want to bet that commodity prices rise, you might want to take a look at the debt of coal companies.

 

Sorry, but I think this is a huge fallacy.

 

Oil can rise a lot and coal can still stay in the dumpster. They are not really closely connected.

Nat gas is more connected to coal, but even nat gas can go probably 2x up in Americas without moving a needle of coal prices.

 

On a related note, I think most people at CoBF don't distinguish oil vs. natgas enough. They are also not closely tied. Oil could go to $70 without natgas moving up much. (And possibly vice versa). Natgas pricing is energy/heating driven, while oil is transportation driven. So there are plenty of scenarios where oily companies prosper while natgas companies don't. And vice versa (depending on region, etc.).

[zippy1]

http://finance.yahoo.com/news/chesapeake-energy-corporation-announces-private-222500600.html

OKLAHOMA CITY, Dec. 2, 2015 /PRNewswire/ -- Chesapeake Energy Corporation (CHK) today announced the commencement of private offers of up to $1.5 billion aggregate principal amount (the "Maximum Exchange Amount") of its new 8.00% Senior Secured Second Lien Notes due 2022 (the "Second Lien Notes") in exchange for certain outstanding senior unsecured notes of the Company, upon the terms and subject to the conditions set forth in the Company's confidential offering memorandum and related letter of transmittal, each dated December 2, 2015.

 

[Jurgis]

http://finance.yahoo.com/news/chesapeake-energy-corporation-announces-private-222500600.html

OKLAHOMA CITY, Dec. 2, 2015 /PRNewswire/ -- Chesapeake Energy Corporation (CHK) today announced the commencement of private offers of up to $1.5 billion aggregate principal amount (the "Maximum Exchange Amount") of its new 8.00% Senior Secured Second Lien Notes due 2022 (the "Second Lien Notes") in exchange for certain outstanding senior unsecured notes of the Company, upon the terms and subject to the conditions set forth in the Company's confidential offering memorandum and related letter of transmittal, each dated December 2, 2015.

 

Yeah. That's what a bunch of companies do now. Both positive and negative. Positive that they push out the maturities, which benefits both equity and remaining notes (that they'd have to redeem/refi before 2022). Negative is that you have even senior (secured) notes in front of you if BK happens. Interest costs might be a wash (or even lower) depending on which notes are tendered.

 

Also shows how the company values its notes right now.

 

I have some unsecured 2020's. Not buying more. Probably not selling now either.

[fareastwarriors]

Chesapeake Shareholders Sell First, Ask Questions Later

 

http://www.wsj.com/articles/chesapeake-shareholders-sell-first-ask-questions-later-1449174810

[Picasso]

Rumors that CHK is going to early file after hiring Kirkland.  Anyone still want to argue that Icahn didn't make a terrible mistake here?  Unless he's buying up those 2nd lien bonds @ $38 this morning probably safe to say his investment is worth zero.  I'm sort of surprised to see those 2nd liens trade so low.  What's left for the rest of the bondholders?

 

The notes maturing next month went from $95 to $75.  That's a 351% yield to worst.  I'd expect those bonds to keep trading lower as well.  What a disaster....

[Jurgis]

What's the CUSIP of the 2nd lien bonds? I don't see them on Fido.

[xtreeq]

What's the CUSIP of the 2nd lien bonds? I don't see them on Fido.

 

I think it's U16450AT2

[CorpRaider]

Pretty bad.  Still the GOAT.  Will be interesting to see if he's in the debt. 

[Picasso]

165167CQ8 for the 2nd liens

[tede02]

Anyone still want to argue that Icahn didn't make a terrible mistake here?

 

Not going to argue whether Icahn made a mistake but will fully admit I made a one following him without a good understanding of E&P companies generally. 

 

Although, as of Q3, it appeared the company had quite a bit of liquidity (appeared enough to carry them for far more than one quarter).  The Q4 results will tell it all I guess. 

[CorpRaider]

I got dinged on TLM rolling with uncle Carl, but the Spaniards saved us from a similarly bad scenario. 

[zenith]

no bk yet, will have to see what happens (the company denied the reports). What is interesting on the CHESAPEAKE ENERGY CORP

CPN: 3.250% Due : 3/15/2016 Callable at $100.000 on 3/9/2016 bonds you mentioned, is they traded down to around 75 and settled at 85, a nice return if you happened to be that quick. However the spreads were quite wide. 85 still looks like a good deal with a little over a month left. the reinvestment risk mean the ytm is really a useless figure.

[Picasso]

There's probably a 50/50 chance they file before maturity.  That would leave the bonds essentially worthless to the rest of the capital structure for an 18% return.  That's the definition of playing Russian roulette when you're investing.

[BeerBBQ]

With over almost $6 billion in liquidity, operating flexibility (seems like they can reduce capex needs materially and still keep production flat), the possibility of selling assets (even if at fire sale prices), and other levers that can be pulled, why do you think it is 50/50 that they file before march maturity?

 

[Picasso]

CHK needs to reject their midstream contracts and the only way to do it will be in some kind of a strategic restructuring.  It will also wipe out anything that aren't the 2nd lien notes based on where they happen to be trading.  Every day that goes by is just CHK being crippled by their take-or-pay contracts on production that isn't going to turn a profit for a long long time.  I'm sure there are a handful of restructuring firms giving CHK pitches on the best way to go about this.  I say 50/50 based on where the credit is trading. 

 

Counter parties like Williams thinks this is a 2019 restructuring (if at all) but I think they either had their heads in the sand or were being misleading.  Having liquidity, assets and cash isn't going to prevent an early filing.

[BeerBBQ]

Why is BK the only way to renegotiate those contracts?  They have already renegotiated them once outside of BK.  In BK, those contracts would get renegotiated to a market rate anyway. So if you are WMB's, why not go ahead a do that now (or further reduce the burden to CHK) and avoid the time/cost/uncertainty/potential for business disruption/potentially avoid damage to merger/etc.  CHK talked about their ability to add more dedicated acreage, further flattening the rate but for longer period of time, their position in the STACK, etc on q2/q3 calls so it seems that they might have a little negotiating leverage esp with the current consensus opinion that they are close to filing with part of the reason being these contracts. Also, wouldn't it be better for these midstream companies to lock in contracts today considering competition is increasing in certain regions and many other e&p companies are likely to have issues which could further increase uncertainty surrounding volumes?

 

Why is CHK the one that always gets singled out for these commitments.  AR has $17B, but has 1/3 of CHK's annual production and 1/10 of the acreage CHK has but no one seems to care because of their hedge position. 

 

Also, if CHK's situation is so dire that they may not be able to pay a $500m maturity in a month, why did they announce two weeks ago that they would be redirecting the preferred dividend to debt repurchase?  If they are strapped for cash, wouldn't they be using that for operations/near term debt repayment?

 

Additionally, yesterday they denied that they had recently hired K&E with the implication being that they are not like several other companies that are on the brink or who filed shortly after hiring K&E.  If they lied and really are that close to BK, what is the point of lying about it? What would they have to gain?

 

I understand that other companies have filed for BK when they still have had cash/revolver capacity or other potential options to explore.  I am not saying that CHK will never file nor does not have challenges, I am just trying to understand why they would file THIS early.

 

 

 

[Picasso]

Why is BK the only way to renegotiate those contracts?  They have already renegotiated them once outside of BK.  In BK, those contracts would get renegotiated to a market rate anyway. So if you are WMB's, why not go ahead a do that now (or further reduce the burden to CHK) and avoid the time/cost/uncertainty/potential for business disruption/potentially avoid damage to merger/etc.

 

Partly because this is more of a WMB/ETE problem than it is a Chesapeake problem.  Chesapeake equity and bondholders have already been largely wiped out but there is still value left in WMB which WMB/ETE needs to protect (convenants to protect for the bondholders as well, take a look at their debt).  If you start seeing further reduction in rates beyond what has already taken place then you will see almost all the equity value in the likes of a WMB evaporate.  Then what happens to the rest of WMB's customers?  Who's going to replace that volume?  I don't think their "market" rates are going to remain stable to what we've seen in the past.  It's one thing to extend terms and increase volumes versus outright rejecting contracts in bankruptcy because you're sitting on production that is not going to breakeven anytime soon.  Do you think the 2nd lien creditors of Chesapeake are going to have them burn through even more cash?

 

If the inevitable is going to happen to CHK (it wasn't that obvious when CHK last changed the revolver terms and amended the take-or-pays with WMB), then WMB has no reason to lower the terms even further knowing they are going to get rejected at some point anyway.  It's about bleeding as much out of CHK as they can while they can because the CHK filing is going to be unavoidable.  The same thing happened with ACI and KMI.

 

Why is CHK the one that always gets singled out for these commitments.  AR has $17B, but has 1/3 of CHK's annual production and 1/10 of the acreage CHK has but no one seems to care because of their hedge position. 

 

I don't disagree but AR is more likely to come out the other end as a survivor (lower costs, capital markets haven't revolted on them yet). 

 

Also, if CHK's situation is so dire that they may not be able to pay a $500m maturity in a month, why did they announce two weeks ago that they would be redirecting the preferred dividend to debt repurchase?  If they are strapped for cash, wouldn't they be using that for operations/near term debt repayment?

 

It isn't that they can't pay the bond in March, but what the 2nd lien holders are going to pressure CHK to do.  CHK can probably pay the 2017 notes as well.  But the current market value on the 2nd liens is down to $900 million.  Losing out on $500 million to the unsecured notes is a bunch chunk of whatever their recovery value looks like. 

 

Additionally, yesterday they denied that they had recently hired K&E with the implication being that they are not like several other companies that are on the brink or who filed shortly after hiring K&E.  If they lied and really are that close to BK, what is the point of lying about it? What would they have to gain?

 

They would lie because not lying would 100% force them into bankruptcy.  There's maybe some small chance (1%, 5%? whatever..) that something good happens between now and the next debt payment so why force your hand more than it already is?  They're going to get pitched from different restructuring firms and get pressure from bondholders and they'll have a better idea of what the amended revolver will look like towards March/April.  It's really fluid right now so of course they'll directly deny the K&E report but it doesn't mean they aren't starting the process and evaluating those options.

 

I understand that other companies have filed for BK when they still have had cash/revolver capacity or other potential options to explore.  I am not saying that CHK will never file nor does not have challenges, I am just trying to understand why they would file THIS early.

 

Maybe I was too outspoken with 50/50 by March (I've been known to do that) but you can look at where the bonds are trading and not come to much different of a conclusion.  It's going to come down to pressure from the bondholders and right now (aside from the cash CHK is already burning and above market take-or-pays) that $500 million is looking extra juicy to those 2nd lien holders.  Whether it's this year or next year, I'll be surprised if CHK doesn't early file.  They aren't just going to fail to make a big debt payment and then file.  I mean they could, but that doesn't seem like the best way to maximize value for the remaining stakeholders.

[BeerBBQ]

I appreciate your extensive reply.

 

You mentioned 2L holders pressuring them to file.  Can you expand on that a little?  What are the mechanics of that/what process is used/how do they apply pressure?

 

Also, with the 2L trading at roughly 40, what is the market saying CHK's total assets are worth and how does that implied valuation compare to how other company's are priced who are near BK (or what other assets were sold for in recent BKs)?

 

[Picasso]

Bondholders will typically form a committee, approach some kind of restructuring adviser, and that adviser or committee will in turn approach the company.  So Icahn, for example, could have been building up a position in the 2nd lien notes and start applying pressure by showing he (and other bondholders) will be harmed by pulling from the revolver (or remaining cash) to pay the 2016/2017 notes.  That's something that can happen before there is an actual filing.  CHK's board will have to consider their best options and if the case is made that they are essentially insolvent then it's an easy case to make.

 

If you look at the cash burn rates, debt coming up that I'm assuming the market is hinting might be paid, you can probably see value in the $2-3 billion area.  Par on the 2nd liens is just over $2 billion so the more time that goes by, the more that value is going to head lower assuming the commodity markets don't improve in a major way. 

 

In CHK's defense, other unsecured oil/gas notes were often trading around $5-10 when near a BK (versus $15 on CHK right now).  SD unsecured's are trading at $3 and the 2nd liens are at $20.  So I mean CHK unsecured's at $15 is pretty close to a pre-filing price but honestly the whole CHK capital structure has been really bizarre for a while.  CHK had a market cap in the few billions not long ago.  I don't think the optionality was worth a few billion dollars but yet it held up for a while. 

 

I think you can make the case that the recent 2nd lien swap and the time it takes for bondholders to get together/build up 2nd lien positions is somewhere past March.  Just seems incredibly risky to me if you happen to be wrong even though a 25% return looks pretty snazzy.  At least in merger arb there's some value left.  These notes would be pretty much worthless.

[Jurgis]

I think I disagree that unsecureds are worthless if CHK files. But it will depend on a bunch of things, so I won't argue strongly.

[Picasso]

Yeah it depends on who gets new equity and what new Chesapeake will look like and what the markets look like too.  The USN's had a chance to swap higher and didn't so they're going to have to battle it out in court when a filing does come.  Question is what's going to be the fulcrum security.