Chesapeake Energy’s stock soars as debt deals buy time for troubled company

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Shares of Chesapeake Energy Corp. soared on heavy volume Wednesday, after a series of debt financing moves that were announced helped provide the struggling oil and natural gas company with additional financial flexibility.

The stock CHK, +16.86%  ran up 16% in afternoon trading, and has now climbed 32% since closing at a 25-year low of 56 cents on Nov. 19. Trading volume was 134.5 million shares, enough to make the stock the most actively traded on major U.S. exchanges, and well above the full-day average of about 90.7 million shares.

“While the newly announced transactions appear to buy Chesapeake time, we believe asset sales remain critical to the going concern.”

Neal Dingmann, analyst at SunTrust Robinson Humphrey

The Oklahoma City-based company said before the market open that it has engaged with a number of banks to help with the arrangement of a $1.5 billion secured 4 1/2-year term loan facility. Chesapeake said it plans to use the proceeds of the loan to finance a tender offer for unsecured notes issued by its Brazos Valley Longhorn LLC and Brazos Valley Longhorn Finance Corp. subsidiaries, and to fund the retirement of Brazos Valley’s secured revolving credit facility.

“Chesapeake expects these transactions to improve its financial flexibility, as they will allow Brazos Valley and its subsidiaries to support Chesapeake’s current and future debt,” the company said in a statement.

Chesapeake also said earlier that it has commenced “private offers” of up to $1.5 billion of its new 11.5% senior secured second lien notes due 2025, in exchange for certain existing unsecured notes. The existing notes subject to the exchange offer include a 7.0% note due 2024, an 8.0% note due 2025, 8% and 7.5% notes due 2026 and an 8.0% note due 2027.

Chesapeake’s most active debt instrument, the 8.0% notes maturing in 2027, traded Wednesday at 57.50 cents on the dollar, up sharply from 47.90 cents on the dollar on Tuesday.

Analyst Neal Dingmann at SunTrust Robinson Humphrey said “most importantly,” the amendments to Chesapeake’s credit facility increases the company’s borrowing ability, to a leverage ratio of 4.5-times from 4.0-times. In the company’s 10-Q filing of audited third-quarter results, the company defined leverage ratio as the ratio of consolidated debt to consolidated earnings before interest, taxes, depreciation, amortization and exploration expense.

Dingmann said that while he views the financing deals as a “positive” for Chesapeake, as it gives the company with additional financial flexibility for future transactions, he still believes “large asset monetizations” are critical in addressing debt maturities over the next few years, as leverage remains well above the company’s peer group.

“While the newly announced transactions appear to buy Chesapeake time, we believe asset sales remain critical to the going concern,” Dingmann wrote in a note to clients.

What may also be providing a boost to Chesapeake’s stock is a rally in crude oil prices. Continuous crude oil futures jumped 4.2%, after U.S. government data showed the first contraction in inventories in six weeks. See Futures Movers.

The stock has plunged this year, to a close last month at the lowest price since May 1994, as the company has reported financial results that missed Wall Street expectations for three straight quarters. The company’s struggles were highlighted by Chesapeake’s warning that it had “substantial doubt about our ability to continue as a going concern.”

Don’t miss: Chesapeake Energy’s stock breaks the buck for the first time in 20 years.

Also read: Chesapeake’s stock falls to lowest price in 25 years as ‘going concern’ warning weighs.

SunTrust’s Dingmann reiterated his hold rating on Chesapeake’s stock and $1 price target. That compares with the average rating of the 21 analysts surveyed by FactSet of the equivalent of underweight.

The stock has plummeted 74% over the past 12 months, while the SPDR Energy Select Sector exchange-traded fund XLE, +1.64%  has lost 10% and the S&P 500 index SPX, +0.63%  has gained 15%.