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Tuesday, January 5, 2016

Outlook Continues to Appear Bleak for Chesapeake Energy

From Bloomberg Business:
Chesapeake Energy Corp. is having its worst year since 1998 after halting dividend payouts, slashing drilling budgets and cutting one of every six employees failed to rescue the energy explorer from the deepest gas-market rout in 16 years. 
Chesapeake lost 77 percent of its market value this year, on pace for 2015’s weakest performance in the Standard & Poor’s 500 Index. The Oklahoma City-based company’s bonds are trading for as little as 25 cents on the dollar amid heightening concern that Chesapeake will struggle to raise enough cash to avoid defaulting on its debts. 
Chief Executive Officer Doug Lawler may be running out of options to revive Chesapeake’s fortunes less than three years after activist investors led by Carl Icahn handpicked him to replace deposed co-founder and CEO Aubrey McClendon. A complicated debt-reduction measure announced this month with bondholders probably indicates Chesapeake is having trouble raising cash through asset sales, according to Fitch Ratings.

The debt exchange “signals management’s difficulty selling assets in the current stressed hydrocarbon pricing environment” to help close a cash shortfall and cover interest payments, said Dino Kritikos, a credit analyst at Fitch. Gas fields Chesapeake is trying to sell are losing their luster since prices fell to levels not seen since 1999, he said.
From The Motley Fool comes this reasoning for listing Lawler as a CEO on the hot seat:
In a recent interview with The Wall Street Journal, Chesapeake Energy CEO Doug Lawler said, "if I'm not adding value for the shareholders, I fully expect Carl [Icahn] to fire me ... That's the reason I came here." Well, with the company's stock price down nearly 80% since the start of the year, it may be time for Lawler it start getting worried.

Lawler's main misstep was overspending cash flow to chase growth. That's quite the opposite of what he was brought in by Icahn to do, which was to put an end to the company's free-spending ways. Instead, he followed the path of his predecessor, and worse yet, he chose to push production growth into an environment that was oversaturated with oil and gas. 
In doing so, he burned through the bulk of Chesapeake's cash, leading to a rapid return to a lofty debt level.
In further Chesapeake news, the settlement involving underpaid royalties to Pennsylvania landowners now appears to be in jeopardy.  From the Times-Tribune:
A proposed $11 million settlement between Chesapeake Appalachia and landowners who claim they were wrongly charged post-production costs is in jeopardy after the state attorney general’s office filed a motion opposing the deal. 
The agreement between Chesapeake, the nation’s second-largest natural gas producer, and leaseholders was preliminarily approved by a federal judge in October. Since then it has been roundly criticized by the attorney general’s office and other opponents who contend it is overly broad and will release Chesapeake and its subsidiaries from liability on other claims not directly related to the lawsuit. 
The class action lawsuit, filed in 2013 by the lead plaintiffs, Joseph and Billie Demchak of Meshoppen, alleged Chesapeake improperly deducted post-production costs from royalty payments associated with the transportation and refining of natural gas extracted from Marcellus Shale. 

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