From Forbes:
The highly leveraged shale gas champion is burning cash, selling assets and running out of options.Recently:
Chesapeake Energy CHK -6.03% is in pretty bad shape. Shares are down 67% in the past 12 months, to $8.70 today. The last time Chesapeake traded at such a low range was in 2003. Its equity market cap is less than $6 billion. Think this looks like a bargain? Only if you’re really bullish on oil and gas prices. On the contrary, if oil and gas stays low for a couple more years it is hard to see how Chesapeake’s equity is worth anything at all.
Chesapeake’s earnings report last week provided no comfort. The company started 2015 with $4.1 billion in cash. It ended the first half with $2 billion. That’s half its cash evaporated in six months. During that time Chesapeake did not buy or sell any assets. It reduced its capex levels by about 40% over last year. So that cash burn rate pretty well represents the sorry state of its underlying business.
This highly leveraged company is becoming even more leveraged. In the first half, total debt net of unrestricted cash increased from $7.4 billion to $9.5 billion. As profitability has collapsed, net debt has risen to more than 6 times annualized Ebitda. In normal conditions 4x is considered rich. This is worrisome for a company that will need to refinance $5 billion in debt over the next five years.
And because low commodity prices have made vast swaths of Chesapeake’s acreage uneconomic to drill, the company in the first half took $10 billion in asset impairment charges. Investors like to ignore those impairments because they are noncash. But they matter. Writing down the value of assets shrank Chesapeake’s balance sheet from $40.8 billion at the start of the year down to $29 billion. It’s ratio of net debt to total capitalization increased from 30% to 50%.
Revenues from oil and gas and NGLs have been “abysmal” noted Bernstein Research, coming in at $728 million in the second quarter, versus $1.7 billion a year ago. Chesapeake is getting paid just $1.01 per thousand cubic feet of natural gas. And that’s including the effect of hedges. Unhedged, it’s getting just 75 cents per mcf. In the first quarter it generated $2.37 per mcf hedged. The realizations are even worse for NGLs, for which Chesapeake made just $1.90 per barrel in the second quarter — versus $8.34 in the first quarter.
Part of the problem is a huge glut of gas and liquids in the Utica and Marcellus, where there’s not enough pipeline capacity to evacuate it all out to market. Chesapeake has curtailed production in both regions. But that won’t solve the bigger problem. According to analyst Kevin Kaiser at Hedgeye, Chesapeake is caught in a “midstream stranglehold.” It is contractually obligated to pay fees to pipeline giant Williams Companies for its dedicated capacity. Most of Williams’ contracts with Chesapeake are on a “cost of service” mechanism, which guarantees Williams a return on its investment in building out pipelines....MUCH MORE
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