benhacker Posted February 10, 2016 Share Posted February 10, 2016 CHK looks sick, but if they default on this March note I would be quite surprised, and I think it would be quite a statistical anomaly in the history of time to default from their historical credit ratings. Nat Gas has dropped like a stone, the swap was bearish, so maybe this would be a time to see something quite unique from a default perspective. I guess we'll see... I don't see CHK advocating for stakeholder over shareholders just yet... Link to comment Share on other sites More sharing options...
Jurgis Posted February 10, 2016 Share Posted February 10, 2016 Like Picasso says, I believe common is toast. I think that unsecured's can get at best 50% par if all stars align. In the worst case unsecureds are also toast or 10 cents on a dollar. I think that it's best for most noteholders that they file before March while they still have cash and they don't pay the March unsecured at par. However they will probably try to limp through, so I would not try to predict when they will file. Link to comment Share on other sites More sharing options...
BeerBBQ Posted February 10, 2016 Share Posted February 10, 2016 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. Unless there is a covenant breach, the large holder(s)/committee w/ advisors can really only try to persuade the board that not filing will cause further degradation of value to bond holders. I can see that in general, pressure from bond holders can be effective because most boards are not comprised of skill sets that are needed in complex bankruptcy situations and would be more likely to take the advice of restructuring/bk counsel that would be advising along similar lines of bond holders. However, this specific board might be a little less amenable to accepting the proposition that creditor value is at risk at this point. Even if Icahn’s surrogates are pushing this line of thought too (under the assumption that Icahn has purchased bonds and is trying to gain getter control through that avenue), I don’t think they will be able to persuade the other board members who appear to be surrogates for SAM. Based on SAM recent fund commentaries, it seems they believe the assets are worth substantially more than liabilities and there is still equity value. Combine that with the potential for an improving natural gas market (even though everyone wants to focus on Oil price, CHK ‘s production is 70% natural gas and there is a case that can be made that supply/demand dynamics are actually already improving there) and I think it is a low probability that the board determines they need to file before March. On the valuation side of things, if you assume the equity and preferred are worthless, take the bonds at market value, and assume that the revolver gets completely drawn, the EV would be a little over $6.5B suggesting CHK’s asset base is worth $10K per flowing barrel. The average valuation of several E&P companies with substantial exposure to CHK’s 6 shale regions yields $35K per flowing barrel. Take SD and reduce their debt by 85% (using average value that assets sold for as a % of debt in recent BK’s – 15%) and the implied value for SD assets is $20k / FB. Using CHK’s actual EV yields $18K/FB. Also, private transactions are still occurring at valuations near/above publically traded comps. DVN just bought acreage for $23k per acre (December). CHK has 400k acres in those same counties. If CHK’s acreage there is worth ¼ of the value of that transaction, that acreage alone would be worth the current market value of the outstanding debt. Is there a reason the assets of the #2 nat gas producer with substantial non producing acreage should be valued so much lower than others? Link to comment Share on other sites More sharing options...
Jurgis Posted February 10, 2016 Share Posted February 10, 2016 BeerBBQ: you are saying "current market value of the outstanding debt". But you have to realize that unsecureds are trading at .15 on dollar (not counting March 2016s) and secureds are trading at .50 on dollar. So, yeah, CHK may be worth "current market value of the outstanding debt", but that's small solace for bondholders - or shareholders. The question is really whether it's worth par value of secured and unsecured and IMHO the answer in current situation is "no". If nat gas recovers - and personally I am much more oil bull than nat gas bull - especially coming into spring - then maybe. But weak maybe really. Disclosure: I still have some unsecureds. Link to comment Share on other sites More sharing options...
BeerBBQ Posted February 10, 2016 Share Posted February 10, 2016 Current EV (using face value of debt, pref, and equity) is below SD's implied asset value after taking an 85% haircut to face value of outstanding debt. Why would the bonds see a large haircut from face value in Bk if CHK assets are already being valued below SD's adjusted value and the valuation others received when their assets were sold in BK? Trying to understand the rationale for why CHK's assets shouldn't be worth as much as SD or others. Link to comment Share on other sites More sharing options...
Picasso Posted February 12, 2016 Share Posted February 12, 2016 Beer, I think I'm more in agreement with your thinking than I was a week ago. You can also make the case that making the debt payment in March gives the rest of the shareholders an option (albeit a potentially expensive one) for any improvement in the energy markets into 2017. You can also see more orderly liquidations which can protect whatever value is left. But on the other hand, the take-or-pays are crippling CHK right now and they have limited leverage against that outside of bankruptcy. The midstream's think this is a 2019 restructuring but the 2017 notes are trading around $25. You can make over 300% over the next 18 months if you wanted to take the bet that asset sales + open market debt repurchases are the solution. But hedges are running off for everyone this year and that's what can really make things worse when comparing to 2015 asset sales. It's a tough one but interesting.... Link to comment Share on other sites More sharing options...
Picasso Posted February 12, 2016 Share Posted February 12, 2016 I couldn't find a link but here's the latest from Bloomberg. Chesapeake Said Planning to Pay $500 Million Debt Due Next Month By Jodi Xu Klein and Joe Carroll (Bloomberg) -- Chesapeake Energy Corp. is planning to pay $500 million of debt maturing in March, using a combination of cash on hand and other liquidity that may include its credit line, according to a person with knowledge of the matter. The second largest natural gas producer in the U.S. is also considering selling assets to shore up its capital so it can address more than $1 billion of debt coming due in 2017, said the person, who asked not to be named because the matter is private. Investors in Chesapeake grew nervous this week as its securities plummeted after a news report on Monday that restructuring lawyers at Kirkland & Ellis were advising the company. Chesapeake’s $500 million of 3.25 percent senior unsecured notes that need to be repaid on March 15 dropped as much as 22 percent on the news. Creditors are gearing up for negotiations over how to reorganize the energy producer’s debt load of about $10 billion. At least one group of unsecured bondholders has hired advisers to help evaluate the company’s assets in the U.S., another person with knowledge of the matter said. Strategy Sessions Chesapeake’s lenders have been mapping out strategies for a restructuring, the person said, and the selloff in its debt and equity that started on Monday has raised the urgency. The company has 14 tranches of outstanding unsecured obligations, and its creditors are figuring out who they can team up with to best position themselves in a reorganization, the person said. The gas and oil producer said that it was not planning to file for bankruptcy. Evercore Partners Inc. is advising the company. Chesapeake’s 2016 senior unsecured notes last traded on Thursday in New York, at 86.25 cents on the dollar, up 12.25 cents from their Monday low, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The company’s shares have lost more than 90 percent of their value in the past 12 months and were trading at $1.64 at 2:05 p.m. Friday in New York. Link to comment Share on other sites More sharing options...
Jurgis Posted February 12, 2016 Share Posted February 12, 2016 2nd liens at $50ish might not be a bad investment. Fido shows zero inventory, so I'm not really spending much time on them. Unsecureds at .13 might work too, but only if you can sleep at night, etc. Link to comment Share on other sites More sharing options...
Picasso Posted February 12, 2016 Share Posted February 12, 2016 Problem is the maturity on the 2nd liens. Almost certainly gets restructured before then and hard to know how much CHK draws down the revolver before then if they don't early file. Assets sales and whatever cash is left would mostly go to the USN's in 2017 unless they're able to buy a lot of the debt in the open markets at these prices. I almost think the January 2017's are worth a flyer but it coincides with all kinds of hedges running off so that's going to be a really painful point in this story. This quote tells you it's about to get pretty nasty and I don't think any of us are really equipped to fight this battle. Chesapeake’s lenders have been mapping out strategies for a restructuring, the person said, and the selloff in its debt and equity that started on Monday has raised the urgency. The company has 14 tranches of outstanding unsecured obligations, and its creditors are figuring out who they can team up with to best position themselves in a reorganization, the person said. Link to comment Share on other sites More sharing options...
Jurgis Posted February 12, 2016 Share Posted February 12, 2016 I'm with you man. Link to comment Share on other sites More sharing options...
rishig Posted February 18, 2016 Share Posted February 18, 2016 Anybody have any ideas in terms of how to best hedge against chesapeake going bankrupt. I never hedged my positions previously it might be good to start here (never dabbled in debt either). Under a scenario where equity went to zero within a year or two, I guess I could buy puts or buy debt (I don't want to short this stock that is dangerous). Buying puts is an option although the prices/premium at these levels looks expensive but still an option. Would you guys recommend buying any of the secured debt or something? I will do my research i am very new to debt so i don't know the what i don't know, if you know what I mean.... but the assumption here is secured debt is "safe" bc of CHK's large asset base.. Chesapeake has a complicated capital structure with over a dozen different notes. The notes that are trading at discount to par are all unsecured notes, and figuring out what happens in a restructuring is very complicated in my opinion. I would tread with big time caution. Link to comment Share on other sites More sharing options...
Jurgis Posted February 18, 2016 Share Posted February 18, 2016 The notes that are trading at discount to par are all unsecured notes rishig, I don't believe that's true. IIUC, 2nd liens (e.g. 165167CQ8 that Picasso pointed to) are secured and trading at $.50. Not clear whether they are good investment though. Link to comment Share on other sites More sharing options...
Picasso Posted February 18, 2016 Share Posted February 18, 2016 The 2nd liens are actually unsecured and now trading under $40. Link to comment Share on other sites More sharing options...
Jurgis Posted February 18, 2016 Share Posted February 18, 2016 This says they are secured: http://www.prnewswire.com/news-releases/chesapeake-energy-corporation-announces-private-exchange-offers-for-senior-notes-300187307.html Or things have changed? Or are we talking about different notes? Link to comment Share on other sites More sharing options...
Picasso Posted February 18, 2016 Share Posted February 18, 2016 They're not really secured by specific assets or subsidiaries, they're pari passu against all the CHK assets and multiple subsidiaries that fit into the 2nd lien priority. Link to comment Share on other sites More sharing options...
Jurgis Posted February 18, 2016 Share Posted February 18, 2016 OK. At least this digging led me to the old news that they made revolver "secured" (in the same sense as 2nd liens perhaps, but higher priority?). Previously revolver was unsecured. I have missed this news in the past. Link to comment Share on other sites More sharing options...
tede02 Posted February 24, 2016 Share Posted February 24, 2016 Did anyone catch the earnings call this morning? I had the wrong damn time marked on my calendar. Pleased to see the firm is increasing liquidity by selling assets and renegotiating lease and mid-stream contracts. There is hope at least. Never mind. Found, the webcast replay available on the company's website. Link to comment Share on other sites More sharing options...
FCharlie Posted February 24, 2016 Share Posted February 24, 2016 I don't see how anyone could still want to be short this stock, or similar stocks for that matter. The debt market has offered up one of the greatest opportunities I've ever seen. CHK and others are able to buy in staggering amounts of debt at less than 50 cents on the dollar. Just a few weeks ago people wondered if CHK would ever make the March payment. Turns out they've already retired half of it. I can easily see in a year or two, people look back and see one of the greatest comebacks ever. I can see it with miners and drillers. Companies are not that stupid. CHK is all over their debt and some of it still trades at 20-30 cents on the dollar. People should dramatically reduce forward calculations for enterprise values as they are going to eliminate mountains of debt without using mountains of cash. Not just CHK but FCX, NE, and others too. Link to comment Share on other sites More sharing options...
benhacker Posted February 25, 2016 Share Posted February 25, 2016 I don't see how anyone could still want to be short this stock, or similar stocks for that matter. The debt market has offered up one of the greatest opportunities I've ever seen. What % of those short the stock, are long the debt? Do you think that maybe you are answering your own question?... if the debt is such a great deal, maybe it's an *even* better deal than the stock, and lower risk, thus making an arbitrage possible. No position currently, but I did buy March debt recently when it was a "coin flip" of if they would file by March '16. Ben Link to comment Share on other sites More sharing options...
frugalchief Posted February 28, 2016 Share Posted February 28, 2016 10-K http://www.sec.gov/Archives/edgar/data/895126/000089512616000395/chk-20151231_10k.htm Link to comment Share on other sites More sharing options...
CorpRaider Posted March 2, 2016 Share Posted March 2, 2016 Wow. Indicted and now reportedly dead in car crash? RIP. http://www.bloomberg.com/news/articles/2016-03-02/oklahoma-city-police-say-aubrey-mcclendon-dead Link to comment Share on other sites More sharing options...
TwoCitiesCapital Posted March 2, 2016 Share Posted March 2, 2016 http://www.bloomberg.com/news/articles/2016-03-02/sandridge-said-to-be-unnamed-company-in-mcclendon-indictment Who would've guessed it.... Link to comment Share on other sites More sharing options...
CorpRaider Posted March 2, 2016 Share Posted March 2, 2016 Yeah, that was kind of what I figured. Link to comment Share on other sites More sharing options...
wachtwoord Posted March 2, 2016 Share Posted March 2, 2016 Wow. Indicted and now reportedly dead in car crash? RIP. http://www.bloomberg.com/news/articles/2016-03-02/oklahoma-city-police-say-aubrey-mcclendon-dead The details scream suicide.... And the stock rallied 23% today. Unrelated I guess. Link to comment Share on other sites More sharing options...
Picasso Posted March 4, 2016 Share Posted March 4, 2016 Crazy moves in the stocks and bonds. Congrats to those who were bottom picking the stock and bonds (or adding to their position). That would make a 4x return on the 2017 bonds if the equity is efficiently/under price here. The bad part with the bonds moving up like this is it limits how much debt they can repurchase and lowers the value of the equity under whatever scenario one is looking at. Notes trading at $20 versus $55 is a big cost savings but obviously a better reflection on the situation/equity. Icahn also has a habit of screwing around with his low float/high short interest stocks (HLF/VLTC, etc) so it wouldn't shock me to see some kind of news that he's upped his stake and cause even more short covering. I still don't think there's any equity value here but so far I've been wrong over the past couple weeks. Link to comment Share on other sites More sharing options...
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