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Chesapeake Energy reported worse than expected earnings before the market opened Tuesday and also issued a going concern notice warning of failure if low energy proces persist. The stock hit the lowest prices since Feb 4, 1999, over 20 years, to 79c the next day.

Chesapeake Drilling

Chesapeake Energy Corp Earnings Beat Before Open Tuesday

($0.11) Missed ($0.10) EPS and $2.06 Missed $2.12 Billion Missed Forecast in Revenue

Earnings

Chesapeake Energy (CHK) reported in the third quarter a net loss that narrowed to $101 million, or 6 cents a share, from $169 million, or 19 cents as share, in the year-ago period. Excluding non-recurring items, such as unrealized derivatives gains and asset sale, the adjusted loss per share widened to 11 cents from 1 cent, missing the FactSet consensus for a per-share loss of 10 cents.

Total revenue fell 14.8% to $2.06 billion, below the FactSet consensus of $2.12 billion, as a miss in marketing revenue offset a slight beat in oil and gas revenue.

Chesapeake 10-Q filing with the SEC warns “material” impact on its financial position as a going concern

“If continued depressed prices persist, combined with the scheduled reductions in the leverage ratio covenant, our ability to comply with the leverage ratio covenant during the next 12 months will be adversely affected which raises substantial doubt about our ability to continue as a going concern, Failure to comply with this covenant, if not waived, would result in an event of default under our Chesapeake revolving credit facility, the potential acceleration of outstanding debt thereunder and the potential foreclosure on the collateral securing such debt, and could cause a cross-default under our other outstanding indebtedness.” Company 10Q

Chesapeake is at risk of defaulting on the above leverage covenant in its revolving credit facility. If the company were to fall out of compliance with that covenant, it would be in default, and the entire balance would become due. This would cause the company to fall out of compliance with other debt it has, sending those debts into default.

Chesapeake Energy Corp

Market Reaction $0.91 USD −0.37 (-29.15%) Closed: Nov 6, 2019 Close

CHK Stock 11 6 2019

Highlights

  • Q3 total production fell 11% Y/Y to 478K boe/day from 537K boe/day in the year-earlier quarter but rose 3% when adjusted for asset purchases and sales
  • CHK projects Q4 production to rise by ~10% over Q3 levels.
  • Q3 oil and gas revenues fell 2.4% Y/Y to $1.17B but beat analyst consensus estimate of $1.15B,
  • Marketing sales slid 27% to $889M and missing consensus of $895M.
  • CHK's average realized oil prices during Q3 rose to $60.66/bbl from $58.77 in the prior-year quarter when including the effects of realized gains from hedging, while its average realized natural gas price fell to $2.38/Mcf from $2.69/Mcf and its average realized natural gas liquids price sank to $12.44/bbl from $27.37/bbl.

Outlook

For FY 2020, CHK anticipates flat oil production vs. FY 2019 while reducing its total capex forecast by ~30% to $1.3B-$1.6B, with a~10% reduction in 2020 production and G&A expenses.

Chesapeake plans to reduce spending by almost a third next year as it seeks to generate free cash flow, its third-quarter capital expenditures rose 16% from a year earlier as it completed more wells. The producer is standing by its budget guidance for full-year 2019.

Chesapeake Debt Blowout and Overhang

 Chesapeake’s borrowings totaled $9.73 billion as of Sept. 30, up from $8.17 billion at the end of last year.

Chesapeake’s 8% coupon notes due 2025 are among the most actively traded securities in the high yield market, according to Trace. The bond’s price dropped by over $4, the largest price drop on record for the security. Chesapeake’s 8% coupon notes due 2027 also plunged to their lowest price ever.

“We could go out and seek a waiver at any time from our bank group, but at the moment we continue to be focused on the strategic levers that result in permanent debt reduction,” Chief Financial Officer Nick Dell’Osso Jr. said.

 

 

Energy Distress 2019

Just a year ago CHK completed a $1.9 billion takeover of shale explorer WildHorse Resource Development Corp. 

Chesapeake has already taken some steps to cut debt. In September, the company announced a $588 million debt-for-equity swap. In an earnings statement earlier Tuesday, Chesapeake said it had restructured gas gathering and crude transportation contracts in South Texas and the Brazos Valley to improve future returns.

The danger is a domino-effect of defaults would be overwhelmingly destructive. Part of its debt is secured by collateral that would be foreclosed on, further limiting the company's ability to service its debt, and Chesapeake would almost certainly become insolvent.

Meaning common shareholders go to the back of the queue when it's liquidation or reorganization. Based on that risk investors have a very low chance of getting a return, if not surviving.

Chesapeake operations

 

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