Chesapeake Energy uses Oil Patch Financial Engineering to buy time

<p>The best technology in the oil slick today is economics. It is clear in how Chesapeake Energy (NYSE: CHK) uses financial technology to minimize the short-term cost of its huge debt.

Source: Casimiro PT /

Chesapeake has been battling the debt for several years, but it was still over $ 9.1 billion, up from $ 16.5 billion in assets, on September 30.

The latest cunning plan includes issuing $ 1.5 billion in new bonds, at 11.5%, to replace them with lower coupon debt at a discount on cash value. This increases the reported cost of the debt but reduces the amount of capital by 30-35%. Bondholders are taking the deal because their existing 8% bonds are trading at less than 50 cents on the dollar.

Getting Chesapeake Energy Corp time to get debtors cut. Time is the most valuable commodity in the oil slick as 2020 approaches.

How much time?

Chesapeake shares have risen 11% since December 4. But that puts them at about 79 cents each, a market value of $ 1.5 billion for a company that had more than $ 10 billion in revenue last year.

It’s a terrible downturn for the company that was virtually born of the fracking revolution by cracking rocks in the northeastern part of the United States to extract national gas. At its peak in 2008, Chesapeake sold for over $ 50 per share. During the boom years early in the decade, Chesapeake even paid regular dividends, up to 35 cents a share.

But those days are too long gone, not just for Chesapeake but for the rest of the Frackers. Now it’s “brother, can you save a dime.”

About 33 companies have filed for bankruptcy this year, right up until September, as oil prices have fallen from a peak of $ 110 per barrel in 2014 to a recent trading range of $ 50-60. Staying out of bankruptcy in this environment is considered a great achievement.

Triple Technology Impact

This does not only affect the oil patch in Texas.

The “success” of the recent OPEC + summit looks a lot like Chesapeake’s restructuring. It takes in option traders for short-term deals, but few people really know where oil prices are going.

This is because technology affects oil in three ways, none of which are good. Renewable energy is now approaching the cost of natural gas, while efficiency is reducing demand. Fracking produces more product from previously played out fields. The trade war, which is reducing China’s demand for oil, is not helping.

Oil companies are also getting better at finding new oil pools. In addition to Exxon Mobil’s (NYSE: XOM) strikes Guyana, due to launch on the market next year, there are reports of large new fields outside Norway and Mexico. Nigeria, Iraq and the United States do not play according to OPEC rules, while Iran defies sanctions.

Every time the Swedish Energy Agency looks at the balance between supply and demand, it sees lower prices. While a slow bleeding in prices is predicted, there is enormous uncertainty. Traders place futures above $ 80 per barrel and below $ 40. Natural gas prices may rise this winter to $ 5 per mcf, but they may also fall below $ 2 next year.

The conclusion on CHK stock

Fracking means that the United States can dominate the oil market in the coming decade. But the value of that dominance seems overestimated. It is just a cloud over the CHK share.

The dollar is not only strong because of American technology. It is strong as oil continues to trade in dollars. Lower oil prices mean that there is less demand for dollars.

If anything, the US economy will decline next year, it will. Chesapeake’s financial technology can only be a preacher of what is to come for everyone, and not just in the oil patch.

Dana Blankenhorn is a finance and technology journalist. He is the author of the historical mystery novel The Reluctant Detective Travels in Time now available at the Amazon Kindle Store. Write him on or follow him on Twitter at @danablankenhorn. At the time of writing, he did not own any of the companies mentioned in this story.