It seems that not a week goes by unless we see Chesapeake Energy Corp. (NYSE: CHK) post another new low. The last time the shares traded at around $5.30 was in 2002. By July of 2008, the stock had reached an all-time high over $65 a share. By the end of that year, shares traded down around $11. And while the stock price has bounced above $30 a couple of times since then, the decline that began in the middle of last year has been steady.
Some of the share price drop is due to lower commodity prices. In the third quarter, Chesapeake posted an average realized price per barrel of oil of $62.68, down more than $5 a barrel sequentially, and down more than $22.00 a barrel compared with the price a year ago. Oil accounts for 17% of Chesapeake’s total hydrocarbon production.
The company’s average realized price for natural gas was $1.14 per thousand cubic feet, down from $2.09 a year ago but higher than the $1.01 price in the second quarter of this year. Natural gas accounts for 72% of Chesapeake’s production.
Chesapeake’s recent troubles though are exacerbated by long-term debt and liabilities of around $11.5 billion. On Thursday the final trade on a $1 billion senior unsecured note was transacted at $45.250 at a yield of 25.743%. A recent trade Friday morning at $44 yielded 26.518%, and there was even one trade at $43.250 yielding 26.992%.
The company’s debt is junk-rated by all three major ratings agencies and the company’s bonds are trading in very high numbers. The yield curve is steepening and traders are of two minds: either investors are giving up on Chesapeake’s debt or short sellers are piling in.
Credit default swaps rose to record spreads on Thursday. HighYieldBond.com explained:
Over in the CDS marketplace, five-year protection pushed out 10% [Thursday] morning, to a record wide of 50.75/53.5, according to Markit. That’s essentially $490,000 more of an upfront payment, at roughly $5.2 million at the mid-point, in addition to the $500,000 annual payment, to protect $10 million of the Chesapeake senior notes.
With commodity prices not expected to improve much, if at all, in 2016, how Chesapeake will meet these payments is becoming a larger issue.
Chesapeake’s shares traded down more than 5% Friday morning and have already posted a new low at $5.06.