Company loaded up on debt during the energy boom years, but the commodity bust is now hitting hard
From the Wall Street Journal
A prolonged slump in commodity prices is rattling the market for junk-rated energy debt, but few firms have been hit harder than Chesapeake Energy Corp.
Half of the 10 worst-performing junk bonds over the past week were issued by Chesapeake, the Oklahoma City company that is the second-largest U.S. natural gas producer behind Exxon Mobil Corp. The company, a former Wall Street darling once headed by investor Aubrey McClendon, has sold billions of dollars in debt to help finance oil and gas purchases in recent years.
A few years ago, with oil prices near $100, Chesapeake was a favorite among debt investors because the sheer volume of the company’s issuance made its bonds relatively easy to buy and sell without significantly moving the market price. Its share price briefly exceeded $60 during the energy-price spike of mid-2008.
But lately there have been many more investors seeking to sell the company’s shares and bonds than to buy them, forcing down prices and intensifying fears among analysts and traders that the worst could yet be ahead. Its shares fetch less than $5 and many of its bonds between 30 and 40 cents on the dollar, down from close to 80 cents just three months ago.
The sharp decline in oil and gas prices this week has renewed concerns among investors that Chesapeake, and other U.S. energy producers, will be unable to repay bondholders if commodity prices don’t recover soon.
It isn’t an unusual predicament in the energy bust. Bonds from other low-rated producers have fallen, too: Through Wednesday, Oasis Petroleum Inc. bonds are down 9.1 cents over the past week to about 78 cents on the dollar, and bonds from EP EnergyLLC are down 10.5 cents to 67, according to data from MarketAxess Holdings Inc. A bond from California Resources Corp. is trading around 45 cents, down about 15 cents since the beginning of December.
Production firms aren’t alone. Bonds from electric utilities including Dynegy Inc., AESCorp. and NRG Energy Inc. have declined in recent days, reflecting concerns that falling natural-gas prices will drag down electricity prices as well. Through Wednesday, a Dynegy bond was down 5.8 cents on the dollar over the past week to 88.5 cents, an AES bond was down 3.1 cents to 87.9 cents and a bond from NRG Energy was down 4.2 cents to about 87 cents.
“Sentiment is awful,” said Henry Peabody, who helps oversee the $1 billion Eaton Vance Bond Fund. “We’re flirting with credit-crisis energy prices, and we’re probably flirting with credit-crisis bond prices to some degree in these sectors.”
Looking to reduce debt, Chesapeake is offering investors a bond swap for up to $1.5 billion of new debt. Investors who agree get hit with a principal reduction but also get a lien on the company’s assets, increasing the odds they will ultimately get much of their money back. It is a tactic analysts say more companies likely will be forced to attempt in coming months. Some have already completed similar deals, such as SandRidge EnergyInc. and Halcon Resources Corp.
Many analysts don’t think it will be enough. In a report on Dec. 3, a day after Chesapeake’s exchange offer was announced, analysts at research firm CreditSights said they expected the company to file for bankruptcy in 2018 barring a significant improvement in commodity prices. They changed their view on Chesapeake bonds to “sell” from “hold,” and reaffirmed the “sell” recommendation in a note on Wednesday.
“A major concern, and to nobody’s surprise, is the oil and gas environment,” they said in the note.
Chesapeake declined to comment.
The company has been in the spotlight before. In 2013 Mr. McClendon, its longtime chief executive, left the company, citing “philosophical differences” with the board. Some investors questioned the company’s acquisition strategy and others its standards, including permitting Mr. McClendon to borrow against his stock, an episode that ended when a margin call forced share sales. Mr. McClendon has since founded a new venture, American Energy Partners LP.
Not all analysts are downbeat. Jason Wangler,managing director at Wunderlich Securities, still has a “buy” rating on the company’s stock and a price target of $13. The debt exchange offer should reduce the company’s debt load, giving it more flexibility to weather the tough oil-and-gas environment.
Mr. Wangler said the company still had some options, including selling assets when energy prices recover, a strategy management had been pursuing before prices dropped.
But others doubt energy-company investors will get out unscathed. The losses in the junk-bond market are “a precursor of a period of substantial defaults,” said Matt Freund,chief investment officer and portfolio manager at USAA Mutual Funds, which has been underweight bonds from junk-rated energy producers. “There are absolutely going to be a lot of defaults baked in the cake here.”