Tokyo based, expat Cape Bretoner. Learning to live in a de-leveraging world. Better suited to the crusades. CFA & FRM charter holder. Disclaimer: @Firehorsecaper reminds investors to always perform their own due diligence on any investment, and to consult their own financial adviser or representative when warranted. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.
Joined Jun 23, 2015
88 Blog Posts


The stock market took off last Friday Jan. 22nd like Space X’s Falcon 9 rocket, yet Chesapeake’s equity was left on the launch pad in the end, closing at $3.51, down 22% ytd and 82% yoy. The initial exuberance (+17% intra-day) at CHK cutting their pref dividends ($172mm in annual interest savings) gave way to the grave realization that all is not well, and time is is running out. Suspending the dividend on their prefs has been seen as prudent (prefs get paid after debt holders but before equity holders in a wind up). Notably, some of the pref dividend savings will be earmarked to buy back their secondary debt in the open market. Most CHK senior unsecured bond issues are trading distressed, wrapped around $30’s in price. Looking at a specific issue, the CHK 7.25% 12/15/2018 (senior unsecured) traded up to $40.00 for a yield of 47.5% . The bonds are rated B3/CCC+ with a recovery rating of 6 (the lowest rating, implying a recovery in the 0-10% band). This bond was trading above par for the first half on 2015 and only broke par to the downside in July 2015. CHK equity was at $10 when CHK 7.25% 18′ broke par (coincident with the common dividend being cut) and now sits at $3.51. Typically, one would expect the equity to massively underperform bonds on drawdown of this magnitude.  Part of the reason for the poor recovery rating on the CHK senior unsecured is that there is a lot debt with priority ranking ahead of it. The CHK 8% 12/15/2022 (2nd Lien), a $2.5bln benchmark size issue, is rated B1/BB- and traded at $46.25 for a yield of 24.55%. The recovery rating on these bonds is a 1, implying a very high recovery rate (>90%).

The debt load being carried by the top 60 independent oil & gas groups stands at $206bln, up from $100bln in 2006. Chesapeake has $9.8bln of this indebtedness versus $2.3bln in equity market capitalization. A full 1/3rd of the 155 energy names covered by S&P are now rated B- or below with a barrage of fresh downgrades in the offing by Q2 2016 (175 discrete global energy names in the case of Moody’s).


Oil had a strong rally off the lows last week, but US E&P players are being Ubered by OPEC at these prices. One can imagine Saudi Arabia relishing the death throws of “unconventional oil”. The Saudi’s have not had a good run either, downgraded to A+ in Q4 15′ and running a deficit approaching >15% of GDP ($90bln), largely due to lower profits from oil exports. That said, Saudi Arabia’s marginal cost of production is $3/bbl, versus $15/bbl for Iran, $73 for US “Shale” oil ($57 Gulf of Mexico) and $90 in Canada.

Chesapeake expected their negative cash flow for 2015 to be -$2.5bln with oil at $50 per barrel and natural gas at $3.00 per MMBtu. Not privy to projected numbers yet for 2016, but the price side of the equation is not helping at $31.5bbl and $2.12 MMBtu. Part of the solution is curtailing both activity and capex, both of which CHK has undertaken, and efforts continue. In Q3 2015 there were 16 active CHK rigs and there are currently 9 operating. To meet commitments for 2016 Chesapeake might be able to get there with 4-6 rigs. Capex of $280mm is expected in 2016. Interest costs will be $660mm for 2016 and there is a $500mm debt maturity due in March 2016, (CHK 3.25% 03/15/2016 which trades at $96.50). Chesapeake had $1.8bln in cash at the end of Q3 15′. Chesapeake’s $4bln bank revolver was re-negotiated into a secured facility in Q4 15′. Secured facilities further diminish the likelihood of senior unsecured  bondholders getting any substantive recovery in a tap out. As Le Fly has noted, banks generally like providing umbrellas when it is sunny, in the current environment, not so much. Chesapeake results for calendar 2015 will be out Feb. 24, 2016 with an expected $5.5bln loss for the year.

Unit operating cost have spiked 60% in the last decade for the industry overall and while cost cutting has allowed this number to come down to 46% (tightening staff and procurement) meaningfully deeper savings will likely require a deeper dive and could be more costly to implement.

Investors should buckle up, it is going to be a rocky ride. Chesapeake has some high profile holders, including Carl Ichan who owns 10.98% of the equity (holding as at last reporting, but offside >$1bln). When Carl was an infant, in the mid 1930’s, Aladdin kerosene lamps were all the rage. If we ever needed a genie, it is now. JCG

Disclosure: No current exposure to CHK equity or debt. Vetting 1st lien debt of minority (30%) owned oil services/fracking holding, FTS International, FTSINT 06/15/2020, hedged via CHK equity short.



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  1. dyer440

    Good hedge. CHK is toast from a geological & operational perspective. They are the least respected E&P to boot, and many won’t feel bad when they go under.

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  2. Dr. Fly

    Excellent rundown

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  3. firehorsecaper

    Some other data points from this morning (source: Bloomberg):

    US junk-rated energy debt hits two-decade low

    The value of debt issued by junk-rated US energy companies has plummeted to the lowest level for more than two decades, sending a warning signal about the outlook for the North American oil industry.

    The average high-yield energy bond has slid to just 56 cents on the dollar, below levels touched during the financial crisis in 2008-09, as investors brace for a wave of bankruptcies.

    The slump in bond prices took a further step down last week, as crude dropped to 12-year lows below $28 per barrel. Although oil rebounded sharply, at about $32 per barrel on Friday, it was still 14 per cent lower than at the start of the year.

    The US shale revolution which sent the country’s oil production soaring from 2009 to 2015 was led by small and midsized companies that typically borrowed to finance their growth. They sold $241bn worth of bonds during 2007-15 and many are now struggling under the debts they took on.

    Very few US shale oil developments can be profitable with crude at about $30 a barrel, industry executives and advisers say. Production costs in shale have fallen as much as 40 per cent, but that has not been enough to keep pace with the decline in oil prices. “This year in shale will be very hard,” said Bielenis Villanueva Triana, an analyst at Rystad Energy.

    The three leading credit rating agencies have warned that high-yield defaults will rise in 2016 and 2017, driven by failures in the energy sector. On Friday, Moody’s placed 120 oil and gas companies on review for downgrade, including 69 in the US.

    Standard & Poor’s this month cut the oil price assumptions that it uses to assess credit quality and is working on ratings downgrades expected next month. Some investment grade companies are also likely to be downgraded.

    “Energy without a doubt is where the defaults will be concentrated,” said Oksana Aronov, a fixed-income strategist with JPMorgan Asset Management.

    The yield on the Bank of America Merrill Lynch US energy high-yield index has climbed to the highest level since the index was created, rising to 19.3 per cent last week, surpassing the 17 per cent peak hit in late 2008.

    More than half of junk-rated energy groups in the US have fallen into distress territory, where bond yields rise more than 1,000 basis points above their benchmark Treasury counterpart, according to S&P.

    The need to conserve cash is forcing companies to cut back on drilling and completing wells, which has started to reduce US oil production.

    John England of Deloitte, the consultancy, said that cash-strapped oil companies were also likely to try to sell assets to stay afloat. “The dip into the $20s has been a shock to the system,” he said. “People are saying this isn’t going away any time soon. They’re going to have to be able to survive at low prices.”

    Bonds of high-yield energy companies — those rated double B plus or lower — have see-sawed in trade since the start of the year. On four of the past five days bonds issued by exploration and production company Comstock Resources have traded, they have moved more than 5 per cent. The notes, which mature in 2020, yield more than 44 per cent.

    Paper issued by Halcon Resources, Breitburn Energy, and Midstates Petroleum has also languished since the start of the year.

    Ms Aronov said: “The situation is not great but they are priced for disaster. Anything short of disaster will probably move those prices up.”

    “Anytime you are in a situation where you have uncertainty around oil prices without a lot of near-term relief in sight and you have to have a lot of risk moved in the market, it comes at a price,” said Mary Bowers, portfolio manager with HSBC Global Asset Management.

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  4. ibanknothing

    The shakeout of the minnows mentioned–Halcon, Breitburn, Midstates and most of the other low rated companies may have a financial impact but likely will not have a sizable impact on commodity prices. Halcon, for example, produced about 40,000 boe/d last year–roughly 80% crude. Compare that to US crude output forecast of 8.5 million b/d in 2016. (EIA Short Term Energy Outlook), and it’s a drop in the US’ oil patch bucket.

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  5. firehorsecaper

    Chesapeake downgraded to CCC- by S&P. Their closest maturity bond, CHK 3.25% 03/15/2016 traded down $2.50 to $94.00 (51.7% @ yield equiv.). Yikes. Far from a minnow, 2nd largest gas player and 12th largest onshore oil.

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  6. ibanknothing

    Despite the impending restructure of CHK Henry Hub prices barely moved. SandRidge also close to the edge. How many of these outfits need to fail before nat gas prices get a push higher?

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