Chesapeake Energy Shares Are Soaring Today As Clever Financial Engineering Relieves Bankruptcy Concerns

Oil Boom in Texas's Permian Basin
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My firm, Excelsior Capital Partners, is long Chesapeake shares, so we are having a very good day today.  In this Forbes article, I mentioned Chesapeake management's desire to move the company move away from producing natural gas (which represented 74% of Chesapeake’s production in the third quarter) and to black oil.  As I mentioned in the article, that move would reportedly—though no further details have since emerged of a potential transaction involving Chesapeake’s Haynesville Shale assets—be abetted by Jerry Jones, who owns a majority of Comstock Resources’ stock and is more famous for owning the NFL’s Dallas Cowboys.

But Chesapeake’s moves today show that it is not big-hatted oilmen who control the fate of this exploration and production company, but another much more publicity-shy group, the bondholders. 

Chesapeake's moves—described fully in its press releases—amount to an exchange of senior unsecured debt for currently existing secured notes at an average price of about 70 cents on the dollar and a refinancing of debt outstanding for its Brazos Valley Longhorn subsidiary, which represents the dent that was issued by that company’s predecessor, WildHorse Resources, which Chesapeake acquired in February 2019. 

So, by bringing in-house the existing WildHorse debt, Chesapeake can facilitate its transition to an integrated hydrocarbon producer.  This will lessen Chesapeake’s dependence on prices for natural gas, which are once again depressed this winter.

The three press releases were issued simultaneously, but there is no doubt which one is most important.  Chesapeake’s refinancing of the old WildHorse debt would not be possible without the other transaction announced this morning, a $1.5 billion term loan commitment from JPMorgan, Morgan Stanley Bank, Bank of America and MUFG. 

That financing represents is a 4.5 year commitment that contains a few highly technical terms.  It is “first lien last out,” and carries “a position in the collateral proceeds waterfall junior to the revolving credit facility.”  Did you expect a straightforward deal with four major Wall Street banks involved regarding a company that had over $9.5 billion of debt as of the end of the third quarter and a $1.1 billion equity value as of yesterday?

No sentient being could argue that Chesapeake did not overpay for Wildhorse at a $4 billion valuation.  Actually, everything that McClendon and co. purchased over the past 25 years has been subject to that same analysis.  But WildHorse has a key tactical advantage, and one that the nattering nabobs of bankruptcy absolutely missed when they were bidding Chesapeake’s shares down to $0.55 last week.

The WildHorse/Brazos Valley play is located in South Texas’ Eagle Ford shale, which receives pricing based on the Louisiana Light Sweet (LLS) benchmark, not the more widely-followed West Texas Intermediate (WTI) benchmark that is applicable to production from the Permian Basin.  LLS pricing sits today at $60.25 per barrel, a premium to the $58.22.barrel being offered for WTI futures.  That premium is lower than it has been in recent months, but its very existence makes Chesapeake worth much more than the stock market had realized with its laser-focus on the woeful pricing of natural gas, currently quoted at $2.39/mmcf based on futures traded at the Henry Hub benchmark in Louisiana.  

Chesapeake’s oil assets look pretty darn attractive with crude prices above $60.barrel.  Assuming some other transaction regarding Chesapeake’s less attractive gas plays—whether it is a divestment of the Haynesville Shale assets to Jerry Jones’ Comstock or another asset sale—this company is still massively undervalued at today’s price of $0.725 per share.  

So, Chesapeake actually has a chance to thrive, not just survive.  Financial engineering works. It is just a matter of whether it is done correctly, and it looks as if the dark forces of Wall Street and wildcatters have joined together to produce a value-creative transaction for those shareholders— including my firm—brave enough to buy Chesapeake shares amidst their recent plunge.   


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Chesapeake Energy was created in the late-1980s via financial engineering by the late Aubrey McClendon, his partner Tom Ward and legendary oil-patch banker Ralph Eads of DLJ and Jefferies.  So, it should be no surprise that current Chesapeake management has chosen to offset very real solvency concerns, especially from equity traders, using financial engineering. 

My firm, Excelsior Capital Partners, is long Chesapeake shares, so we are having a very good day today.  In this Forbes article, I mentioned Chesapeake management's desire to move the company move away from producing natural gas (which represented 74% of Chesapeake’s production in the third quarter) and to black oil.  As I mentioned in the article, that move would reportedly—though no further details have since emerged of a potential transaction involving Chesapeake’s Haynesville Shale assets—be abetted by Jerry Jones, who owns a majority of Comstock Resources’ stock and is more famous for owning the NFL’s Dallas Cowboys.

But Chesapeake’s moves today show that it is not big-hatted oilmen who control the fate of this exploration and production company, but another much more publicity-shy group, the bondholders. 

Chesapeake's moves—described fully in its press releases—amount to an exchange of senior unsecured debt for currently existing secured notes at an average price of about 70 cents on the dollar and a refinancing of debt outstanding for its Brazos Valley Longhorn subsidiary, which represents the dent that was issued by that company’s predecessor, WildHorse Resources, which Chesapeake acquired in February 2019. 

So, by bringing in-house the existing WildHorse debt, Chesapeake can facilitate its transition to an integrated hydrocarbon producer.  This will lessen Chesapeake’s dependence on prices for natural gas, which are once again depressed this winter.

The three press releases were issued simultaneously, but there is no doubt which one is most important.  Chesapeake’s refinancing of the old WildHorse debt would not be possible without the other transaction announced this morning, a $1.5 billion term loan commitment from JPMorgan, Morgan Stanley Bank, Bank of America and MUFG. 

That financing represents is a 4.5 year commitment that contains a few highly technical terms.  It is “first lien last out,” and carries “a position in the collateral proceeds waterfall junior to the revolving credit facility.”  Did you expect a straightforward deal with four major Wall Street banks involved regarding a company that had over $9.5 billion of debt as of the end of the third quarter and a $1.1 billion equity value as of yesterday?

No sentient being could argue that Chesapeake did not overpay for Wildhorse at a $4 billion valuation.  Actually, everything that McClendon and co. purchased over the past 25 years has been subject to that same analysis.  But WildHorse has a key tactical advantage, and one that the nattering nabobs of bankruptcy absolutely missed when they were bidding Chesapeake’s shares down to $0.55 last week.

The WildHorse/Brazos Valley play is located in South Texas’ Eagle Ford shale, which receives pricing based on the Louisiana Light Sweet (LLS) benchmark, not the more widely-followed West Texas Intermediate (WTI) benchmark that is applicable to production from the Permian Basin.  LLS pricing sits today at $60.25 per barrel, a premium to the $58.22.barrel being offered for WTI futures.  That premium is lower than it has been in recent months, but its very existence makes Chesapeake worth much more than the stock market had realized with its laser-focus on the woeful pricing of natural gas, currently quoted at $2.39/mmcf based on futures traded at the Henry Hub benchmark in Louisiana.  

Chesapeake’s oil assets look pretty darn attractive with crude prices above $60.barrel.  Assuming some other transaction regarding Chesapeake’s less attractive gas plays—whether it is a divestment of the Haynesville Shale assets to Jerry Jones’ Comstock or another asset sale—this company is still massively undervalued at today’s price of $0.725 per share.  

So, Chesapeake actually has a chance to thrive, not just survive.  Financial engineering works. It is just a matter of whether it is done correctly, and it looks as if the dark forces of Wall Street and wildcatters have joined together to produce a value-creative transaction for those shareholders— including my firm—brave enough to buy Chesapeake shares amidst their recent plunge.   


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I have researched stocks for 27 years, starting fresh out of college at Lehman Brothers and then moving to Donaldson, Lufkin and Jenrette. At DLJ I was a Senior Analyst ...