Chesapeake Energy Corp 6.625% Senior Notes Due 2020 chk
June 27, 2019 - 9:21pm EST by
slim
2019 2020
Price: 101.51 EPS 0 0
Shares Out. (in M): 0 P/E 0 0
Market Cap (in $M): 208 P/FCF 0 0
Net Debt (in $M): 10,012 EBIT 0 0
TEV ($): 15,939 TEV/EBIT 0 0

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  • Rather hold treasuries
  • Not a value investment
  • Horrible idea

Description

 

I recommend the purchase of Chesapeake Energy’s 6.625% senior notes due August 15, 2020 as a means to park cash for a year.  As CHK's earliest pending maturity and only $208 million outstanding, I believe the bonds are money good and, with a yield to maturity of 5.2%, the bonds compare favorably to one year CDs yielding 2.75% and short term bond funds and ETFs yielding 3.5% to 4.5%.

Chesapeake Energy.  CHK is an independent exploration and production company.  While historically, and still predominately, a natural gas producer, CHK is devoting most of its capital spending to growing its oil production - oil will constitute approximately 24% of CHK's 2019 production and generate over half its revenue.

Under the direction of its co-founder Aubrey McClendon, CHK went on a buying and drilling spree during the shale boom, leaving it with a lot of acreage, even more debt, a bloated cost structure, and a convoluted capital structure.  Current management took the reins in 2013 and has devoted its efforts since to winnowing assets, deleveraging, instilling cost discipline, and simplifying the capital structure.  These efforts have been largely successful, as CHK's expenses have been contained and its balance sheet greatly simplified.  Nonetheless, CHK remains overleveraged at over 3.5x EBITDA.

CHK currently operates in six geographic areas:  (1) the Eagle Ford Shale in South Texas, an oil and liquids play to which CHK is devoting approximately 24% of its cap-ex and which is generating significant free cash flow; (2) the Eagle Ford Shale and Austin Chalk formations in southeast Texas, an oil and liquids play which CHK acquired with its purchase of WildHorse Resource Development Corporation earlier this year, which is still in the development stage and to which CHK is devoting approximately 31% of its cap-ex; (3) the Powder River Basin in Wyoming, an oil and liquids play which is still in the development stage and to which CHK is devoting approximately 24% of its cap-ex; (4) the Anadarko Basin in northwestern Oklahoma, to which CHK is currently devoting minimal cap-ex; (5) the Marcellus Shale in Pennsylvania, a dry gas play to which CHK is devoting approximately 9% of its cap-ex and which is generating significant free cash flow; and (6) the Haynesville/Bossier Shales in northwestern Louisiana, a dry gas play to which CHK is devoting approximately 6% of its cap-ex and which is generating modest free cash flow.

6.625% Senior Notes.  $1.4 billion of Chesapeake Energy’s 6.625% senior notes due August 15, 2020 were issued in 2010.  The notes rank equally in right of payment with all of CHK's senior notes and are subordinate to CHK's revolving credit facility.  The notes are CHK's earliest pending maturity.  Through debt exchanges and debt repurchases, the outstanding principal was reduced to $437 million by December 31, 2018.  Pursuant to a debt exchange earlier this year, the outstanding principal was further reduced to a manageable $208 million.

Capital Structure.  CHK’s capital structure consists of a $3 billion credit facility ($1.22 billion drawn as of March 31, proforma for the repayment of 2019 note maturities paid in 2Q), $7.4 billion in senior unsecured notes, $1.67 billion (liquidation preference) of preferred stock, and common stock.  CHK's subsidiary, Bravos Valley Longhorn (formerly Wildhorse Resource Development) also has outstanding an available $1.3 billion credit facility ($688 million drawn at March 31) and $700 million in senior notes.  BVL debt is non-recourse to CHK.

Enterprise Value.  CHK’s enterprise value is as follows:

     

At Par Value

 

At Market

Market capitalization

       
 

Price per share

 

1.88

 

1.88

 

Shares outstanding

 

1,633,677,751

 

1,633,677,751

 

Market capitalization

 

3,071,314,172

 

3,071,314,172

           

Enterprise value

       
 

Market capitalization

 

3,071,314,172

 

3,071,314,172

 

Preferred stock

 

1,670,000,000

 

772,324,600

 

Debt (including BVL debt)

 

10,012,514,000

 

9,252,571,719

 

Net working capital deficit

 

1,185,000,000

 

1,185,000,000

 

Enterprise value

 

15,938,828,172

 

14,281,210,491

 

Debt.  CHK’s debt maturities are as follows:

Debt (proforma 3/31/2019)

 

Par Value

       
 

6.625% senior notes due 08/15/2020

 

208,000,000

 

6.875% senior notes due 11/15/2020

 

93,000,000

 

6.125% senior notes due 02/15/2021

 

167,000,000

 

5.375 % senior notes due 06/15/2021

 

127,000,000

 

4.875% senior notes due 04/15/2022

 

451,000,000

 

5.75% senior notes due 03/152023

 

338,000,000

 

7.0% senior notes due 10/01/2024

 

850,000,000

 

BVL 6.875% senior notes due 02/01/2025

 

700,000,000

 

8.0% senior notes due 01/15/2025

 

1,300,000,000

 

8.0% senior notes due 03/15/2026

 

918,514,000

 

5.5% senior convertible notes due 09/15/2026

 

1,250,000,000

 

7.5% senior notes due 10/01/2026

 

400,000,000

 

8.0% senior notes due 06/15/2027

 

1,300,000,000

 

Secured revolving bank credit facility (matures 09/2013)

 

1,222,000,000

 

BVL revolving credit facility (matures 12/2021)

 

688,000,000

       
 

Total debt

 

10,012,514,000

 

Credit Facility.  The revolving credit facility has a borrowing base of $3 billion and matures in September 2023.  The credit facility requires CHK to maintain a leverage ratio of not more than 5.50 to 1 through the quarter ending September 30, 2019, decreasing over time to 4.50 to 1 for the quarter ending September 30, 2020 (and thereafter down to 4.0 to 1).  Without further asset sales devoted to debt repayment, CHK risks tripping this covenant in early 2021.  The facility also contains minimum fixed charge coverage requirements and maximum secured leverage ratios, neither of which are material to the current analysis.

Projected Cash Flows and Covenant Compliance.

     

2019

 

2020

Realized prices

       
 

Natural gas

 

2.75

 

2.50

 

Oil

 

60.00

 

57.50

 

NGLs

 

15.00

 

15.00

           

Production

       
 

Natural gas (bcf)

 

730

 

737

 

Oil (mmbbl)

 

44

 

50

 

NGL (mmbbl)

 

14

 

14

 

Total (bcfe)

 

1,075

 

1,122

           

Natural gas, oil, and NGL sales

       
 

Natural gas

 

2,008

 

1,843

 

Oil

 

2,610

 

2,876

 

NGLs

 

210

 

212

 

Total

 

4,828

 

4,932

           

E&P expenses

       
 

Production expenses

 

604

 

630

 

Gathering and transportation

 

1,120

 

1,169

 

Production taxes

 

145

 

148

 

General and administrative expenses

 

323

 

337

 

Total expenses

 

2,191

 

2,284

           

E&P EBIDTA

 

2,637

 

2,648

           

Less:

       
 

Cash paid for interest

 

665

 

673

 

Cash paid for preferred dividends

 

91

 

91

           

Cash flow before cap-ex

 

1,880

 

1,883

Cap-ex

 

2,185

 

2,200

           

Free cash flow

 

(305)

 

(317)

 

 

 

 

 

 

           

Total debt – EOY

 

10,241

 

10,558

Credit facility balance – EOY

 

1,451

 

2,069

           

Debt/EBITDA – EOY

 

3.88

 

3.99

Maximum allowable leverage ratio – EOY

 

5.25

 

4.25

 

The projections are based on the following assumptions:

  • Realized prices are based on an approximation of the forward curve.  In that regard, (1) approximately 70% of CHK's remaining 2019 forecasted oil production is hedged at an average price of $58.75, and 80% of its remaining 2019 forecasted natural gas production is hedged at an average price of $2.83, and (2) approximately 20% of CHK's 2020 forecasted oil production is hedged at an average price of $58, and 33% of its 2020 forecasted natural gas production is hedged at an average price of $2.75.
  • CHK achieves no further efficiencies in operating expenses in 2020 compared to 2019.
  • CHK makes no asset sales through year end 2020.

 

For reference, consensus EBITDA estimates (per Reuters) are $2.752 billion for 2019 and $2,931 billion for 2020.

Cash Burn and Payment of Debt Maturities Through August 15, 2020.

Balances - 1/1/2020

   
 

Cash

 

0

 

Credit facility balance

 

1,451

 

Credit facility capacity

 

1,549

       

Payment of 6.625% senior notes due 2020

   
 

Date paid

 

8/15/2020

 

Outstanding principal

 

208

 

YTD negative cash flow

 

198

 

Borrowing required - credit facility

 

406

 

Credit facility balance

 

1,857

 

Credit facility capacity

 

1,143

 

There is sufficient cushion for the payment of the 6.625% notes at maturity in August 2020.  As additional comfort, there is substantial asset coverage for CHK's debt; the outstanding principal balance of consolidated debt is approximately 68% of YE 2018 PV-10 of $14.6 billion.

Risks.

  • Risks associated with the WildHorse acquisition, including poor integration, poorer well performance than projected, higher operating costs than projected.
  • Further sustained decline in energy prices.

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Note Maturity

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