Credit Suisse

Chesapeake Energy Debt Refinancing Not Helping Cash Flow: CS

Chesapeake Energy Corporation (NYSE:CHK) debt of $4.00 billion is yet to be settled fully, and the company expects to service the remaining $1.2 billion by the end of this year. However, Chesapeake energy’s debt refinancing strategy of acquiring another debt is only going to further increase the company’s gearing ratio, thwarting its progress towards attaining optimal leverage.

Chesapeake Energy Corporation (NYSE:CHK) plans to take $2.00 billion worth of debt, part of which, will be used to settle the current $1.2 billion. Additionally, the company is also expected to report a cash deficit in 2013, according to analyst estimates, which further ruins its campaign for flawless cash in the near term.

The company has been selling long-lived assets to service its staggering debt, as shale gas exploration costs continue to bleed more cash from the Oklahoma based Oil and Gas company. Chesapeake Energy Corporation (NYSE:CHK) spent $2.35 billion during the September quarter, despite having reduced capital expenditure in the month of September by 18% as compared to August CapEx.

Chesapeake Energy Debt Refinancing Not Helping Cash Flow: CS

Source: Credit Suisse

According to Credit Suisse equity research analysts Arun Jayaram, CFA, David Yedid, and Helen Xu, Chesapeake Energy Corporation (NYSE:CHK) will remain cash distressed for the foreseeable future, through 2015. The company closed its 2011 books with a deficit cash balance of $7.5 billion, but the analysts estimate that in 2012, this balance is likely to deteriorate further to nearly $10.2 billion in cash deficits.

Nonetheless, this figure will reduce immensely as the company looks to cut on expenses, which will likely help it close the year with approximately $2.5 billion, cash deficit. Chesapeake is expected to reduce this deficit further in 2014 to just over $1 billion, whereas, 2015 will register a minor increment in the deficit.

The analysts also revised various estimates with regard to Chesapeake Energy Corporation (NYSE:CHK)’s performance prospects in 2012 and 2013. The company has maintained its 2012/2013 divestiture target of between $17-19 billion worth of asset disposals, as it continues to bleed some of its oil fields. However, the analysts pointed that some of the 2012 targets could be moved to 2013 as Chesapeake Energy Corporation (NYSE:CHK) is expected to fall short of its $13-14 billion worth of divestment in the current year.

Credit Suisse analysts noted, “we are revising our 2012/2013 EPS estimates to $0.48/$1.41 from $0.42/$1.62 to incorporate lower oil production and price realizations, a higher gas vs. liquids mix, and higher costs. Reiterate our Neutral rating and 12-month target price of $22 per share, which is in-line with our NAV”.

While the use of debt to pay out the current commitments will seem to sort out some near term cash flow quandaries, the net effect is that Chesapeake Energy will remain highly indebted, which will milk off the company’s cash in paying hefty interest expenses.

At the time of this writing, Chesapeake Energy Corporation (NYSE:CHK) stock was trading at $17.30 per share, $0.26, or a 1.48% decline from the previous close.


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