Chesapeake Energy Corporation Teams Up With Bankrupt GasFrac (Calgary) To Test Gelled (with what toxic chemicals?) LNG (Highly Dangerous) Fracking in Ohio
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Chesapeake Stock Tumbled — and That’s Bad News for MLPs by Ben Levisohn, Nov. 6, 2019, barrons.com
And we thought yesterday was bad for Chesapeake Energy. Well, today is even worse—and it’s bad for the companies who handle its oil and gas, as well.
Chesapeake stock (ticker: CHK) fell 18% to $1.28 on Tuesday after the company missed earnings and sales forecasts, and listed its “ability to continue as a going concern” among the risks facing it. But somehow, Wednesday has been even worse for the shares.
Chesapeake stock dropped 29% to 91 cents on Wednesday, an all-time low. Chesapeake’s shares were downgraded to Sell from Hold at Tudor Pickering, but that doesn’t seem to be the reason for the decline. Instead, it seems that reality is setting in.
See, Chesapeake has a monster amount of debt—some $8.37 billion in net debt, according to Bloomberg. That debt comes with rules, known as covenants, that can limit Chesapeake’s actions if its debt grows too large relative to certain financial metrics. In this case, it is earnings before interest, taxes, depreciation, and amortization, or Ebitda.
“CHK’s credit facility contains a leverage covenant that begins at 5.5x for allowable leverage, and ramps down quarter beginning in 4Q19 by 25 basis points each quarter. On a total asset basis, we estimate that the company could brush up against this covenant in 3Q20 with our estimated net debt to LTM EBITDA of ~4.5x in 3Q20 vs. covenant restriction of 4.5x, after which we forecast the company to be out of compliance with the covenant,” writes SunTrust analyst Neal Dingmann. “We believe the company will explore all options for asset monetization and additional strategies for leverage reduction given the ongoing concerns with debt levels, difficult high-yield markets, and decreasing covenant restrictions.”
Chesapeake’s bad news has carried over to master limited partnerships, i.e. the pipeline companies who carry its oil, writes Mizuho’s Paul Sankey, who listed “scary new language from Chesapeake (CHK, NC)…in its 10-Q…on concerns of the knock on transport effect of CHK’s contracted positions” as one of the reason that group of stocks got hit. The Alerian MLP ETF (AMLP) fell 1.2% to $8.50 on Wednesday.
Who’s most at risk? East Daley Capital’s Ryan Smith and Zack Van Everen point to Crestwood Equity Partners (CEQP) and Williams (WMB), among others. They estimate that Chesapeake’s reduced drilling could knock $120 million off Crestwood’s adjusted Ebitda in fiscal 2023, while Williams could see above-market rates get knocked to normal levels, which could result in a $140 million dent in its earnings. Energy Transfer (ET), Kinder Morgan (KMI) and Plains All American Pipeline (PAA) also have exposure to Chesapeake, Smith and Van Everen write, though it is much smaller.
Crestwood Equity Partners has dropped 5.6% to $32.65, while Williams fell 3.1% to $22.24, Energy Transfer declined 3.2% to $12.40, Kinder Morgan slipped 1.5% to $20.21, and Plains All American Pipeline finished off 0.6% to $18.74.
Fracking pioneer Chesapeake Energy is drowning in debt by Matt Egan, Nov 6, 2019, MSN.com
Chesapeake Energy helped pioneer America’s shale natural gas revolution. Now the company is warning that it may not survive the era of cheap gas it helped to usher in. [by greed]
The Oklahoma energy company said Tuesday in a filing to the Securities and Exchange Commission that if “depressed prices persist,” there is “substantial doubt” about its ability to continue as a “going concern.”
The warning underlines just how far Chesapeake Energy has fallen. The company’s early bets on fracking made it a natural gas powerhouse, and at one point it was the nation’s No. 2 natural gas producer. Aubrey McClendon, Chesapeake’s late founder and CEO, was considered one of the leaders of the shale boom.
But the company now is drowning in $10 billion of debt. And it’s struggling to pay it all back, because America is swimming in excess natural gas, keeping prices very weak. Chesapeake’s average realized natural gas price dropped nearly 12% during the third quarter.
Chesapeake’s share price plunged 15% on Tuesday to $1.34 following the warning and a weak earnings report. The stock has lost 98% of its value since closing at a record high of $65.63 in July 2008.
The financial problems have been amplified by a bid to diversify away from natural gas by betting big on oil. The company’s October 2018 deal for shale oil driller WildHourse Resource Company, valued at $4 billion, including debt, came when U.S. oil prices were trading at nearly $70 a barrel. Weeks later, crude plunged below $45 a barrel. Oil prices have yet to fully recover.
Chesapeake’s balance sheet is carrying $9.7 billion of debt, compared with $8.2 billion at the end of 2018 — nearly five times more than Chesapeake’s entire market value.
The company warned in the SEC filing that its leverage ratio could breach certain restrictions over the next 12 months. Failure to comply with these restrictions would cause the company to default on its revolving credit facility and other loans, Chesapeake said.
Chesapeake said that these restrictions could be waived by its bankers. And in the meantime, the company is scrambling to pay down debt.
Citing weak prices, Chesapeake on Tuesday announced plans to slash its drilling and completion activity by 30% in 2020. And the company plans to cut production and general expenses by about 20% in a bid to achieve free cash flow. Executives also said they will consider selling assets to raise cash.
“We’ve been keenly focused on absolute debt reduction, and we’ve made great strides,” Domenic Dell’Osso, Chesapeake’s chief financial officer, told analysts during a conference call.
“The volatile commodity price environment has pressured the speed and timing of accomplishing these goals,” Chesapeake CEO Robert Lawler said during the call, “but we will continue to make incremental progress and improve our competitiveness and profitability”
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