Chesapeake Energy Corp (CHK)

[LouisDesyjr]

Chesapeake Energy Is Dead

Chesapeake Energy is a dying company and burning cash at an incredible rate. While the company had over $1,759 million in cash as of the quarter ending September 30, 2015, it is not enough to get the company through this bad period of low oil prices, low gas prices and too much debt. (CHK 10Q report for period ending Sept 30, 2015: http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=10987640-823-424284&type=sect&TabIndex=2&dcn=0000895126-15-000292&nav=1&src=Yahoo )

The day after the end of that quarter, the company probably redeemed $395 million in contingent convertible bonds. According to an 8K report and press release, (http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=11015660-841-5292&type=sect&TabIndex=2&dcn=0000895126-15-000300&nav=1&src=Yahoo ) , the holders of those bonds had the right, at their option to redeem $1,000 of face value in those bonds for $1,000 in cash.

I can not see anyone passing up the chance to do that since the bonds were probably trading for below that and gave those bond holders a way out of their investment whole, instead of waiting around and hoping that somehow the company survived until gas and oil prices went back up. The company stated in the 8K report that $393 million were redeemed and only $2 million remain outstanding. After paying out the $393 million, the $1,759 million in cash would have been reduced to $1,366 million in cash.

In January 2016, the company stopped paying dividends on its convertible preferred shares. This saves the company $43 million in quarterly dividend payments but does not get the company more cash. (CHK Press release: http://www.chk.com/media/news/press-releases/Chesapeake+Energy+Corporation+Suspends+Quarterly+Preferred+Stock+Dividends+1+22+2016+ )

The next big event coming up is the $500 million in bonds that will mature on March 15, 2016. This is what is going to cause the company to file a Chapter 11 plan on or before that date. There is no reason to pay out $500 million in cash if the company can't or won't pay dividends on the preferred shares of only $43 million.

I expect the company earnings release on February 24, 2016 will show that the company continued to lose money in the fourth quarter 2015 since the company lost money in the prior quarters. I predict that there will be a repeat of the write offs in the range of a four or five billion that occurred in each of the second and third quarters of 2015 since oil and gas prices are just as bad as before. (http://seekingalpha.com/article/3661316-chesapeake-energy-5_4-billion-impairments ) This additional large write off for the 4th quarter of 2015 will probably wipe out what is left of the stockholders equity and ensure that the existing common shares and preferred shares will recover nothing in the impending Chapter 11 bankruptcy.

While the company could, in theory, redeem the bonds at maturity on March 15, 2016 for $500 million, that would leave the company without enough cash to continue operations and do the capital spending that needs to be done. If the company made the $500 million payment, that would take $500 million from the $1,366 million; leaving the company with $866 million in cash at the end of the day on March 15, 2016. That is not enough for the company to make it through 2016 and does not take into account for money that was spent on capital expenditures in Q4 for 2015 and Q1 for 2016.

The other parts of the 'puzzle' are how much cash can we expect the company to lose or burn thorough in the fourth quarter of 2015 plus the first quarter of 2016. The 10Q for 09/30/2015 report shows that cash dropped by $2,349 million for the first nine months in 2015, for an average quarterly burn rate of $783 million per quarter. While there are costs that can be cut and have been cut, most of the use of cash was on 'drilling and completion' costs of $2,696 million; without which revenue would decline at a faster rate as older wells had production drop off. Even without paying to redeem the $500 million in bonds on March 15, 2016, the company probably is almost out of cash now and simply can't pay the bonds with cash on hand. While the company might be allowed to do some sort of a shell game where it draws down on a credit line to pay off the bonds, that just moves the problem from one play to another and gets the company no where. The only long term solution to the problems of Chesapeake Energy is to file Chapter 11 and turn the company over to the bond holders. The preferred and common shares would be wiped out, but they are dead already.

I wrote the prior parts of this article on Friday, just before CHK announced that they 'plan' on making the bond payment. While I do believe they 'plan' on making the bond payment, I do not think they will be able to do it. As I stated prior in this article, that makes no sense. If the company can't or won't pay the $43 million in preferred dividends, then why would the company pay out $500 million?

Even without a bankruptcy filing, I expect the stock will decline as people start to come to the realization that the common and preferred shares are worthless. A company that can not turn a profit, is losing money every quarter, has leases that are expiring, and billions of dollars in write offs for the last few quarters, has no value for common or preferred shares.

Disclosure: I own March 18, 2016 $1.00 put options, and may buy Jan 2017 or Jan 2018 put options.