Chesapeake Energy’s Bond Prices Plunged on November 13
Chesapeake Energy Focuses on Capital Efficiency to Repay Its Debt
Creditors jittery
Chesapeake Energy’s (CHK) bond coupon rate of 4.9% expiring in April 2022 plunged 9.6 cents, closing at $50.33 on November 13, 2015. Similar falls in the bond prices of Chesapeake’s other notes were seen in the same week as reported by Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Energy prices continued their fall as NYMEX-traded natural gas (UNG) futures touched $2.32 MMBtu ( million barrels per day) while crude oil (USO) created new lows at $41.50 per barrel. This hurt the mood of creditors, as debt repayment capacity is continually being hampered due to lower realized prices for oil and gas. The yield of same debt security reached 18.0% on November 13.
Chesapeake’s reserve value dwindled due to sustained weaker energy prices. It now stands at one-third of that of the company’s total debt. As of September 30, 2015, the total debt of Chesapeake Energy amounts to $11.6 billion. Chesapeake has lost $15 billion during this low energy price phase.
Fitch downgraded Chesapeake to BB-
Fitch estimated that weaker realized energy prices might continue to dampen the cash flows and liquidity profile of Chesapeake Energy and downgraded its long-term issuer default rating from BB to BB-. Though the company has a stronger cash position, it’s expected to bridge the funding gap by relying on non-core asset sales.
Chesapeake has $1.7 billion in cash and cash equivalents as of September 30, 2015. Fitch affirmed that Chesapeake’s size and scale offered financial flexibility compared to other exploration and production companies. Fitch has a stable outlook on Chesapeake.
Energy prices: No recovery in sight
According to the Chesapeake’s chief executive officer Doug Lawler, management is not expecting a recovery in energy prices, and the focus will be on capital efficiency. The $4 billion exploration company is expecting a spending cut of $500 million, and volume growth will be the priority.
Chesapeake estimates that technological advancements can cut production costs by ~25% and enhance capital efficiency by ~20%. It recently announced that it would reduce its workforce by 15%.
Like Chesapeake, many exploration players such as Pioneer Natural Resources (PXD) and Murphy Oil (MUR) are endeavoring to improve their capital efficiencies by introducing new ways of cost-cutting while maintaining volume growth.
Browse this series on Market Realist: