Who knew that CHK could make $1.5B in debt disappear? Leveraging the market pessimism was a great move. CHK has turned $3.5B of debt requiring $210M to service into $2.0B of debt requiring $150M to service. Wow!
I read an article that said CHK has room to duplicate this approach again to further reduce their debt load under similar terms. The unsecured bond holders have very little negotiating leverage because their nuclear option of forcing CHK into BK would likely end up paying them nothing. CHK was also able to reduce its interest expense in the process. It was magic.
For those keeping track of the numbers I'm not counting the three shorter term debt instruments in this summary above. The exact total is $3,833.60M in debt exchanged for $2,354.68M, a difference of $1,478.92M. I calculate the interest savings to be $45.6M
Indian Oil and Gas Company, Chesapeake, and Cheniere. The Indian Oil Company agrees to buy a 50% share of one or more of CHK's lease positions and to pay for 50% of the E&P cost, and then gets 50% of the production at cost. All of the NG is delivered to Cheniere for compression and transport to India. The Indian company gets their half of the NG production at cost and also buys CHK's half at market rates. Cheniere gets a long term delivery contract - say 10 years.
This could be a win-win-win for all three parties. For their upfront investment the Indian Oil Co gets their gas at less than market rates with a long term contract for delivery. CHK gets some cash up-front, cost sharing to pay for the continued development of the lease, and a long term purchase contract for the other 50% of production from the fields they will develop for this purpose. Cheniere gets guaranteed delivery volume for a long period of time.
Just my 2c worth. India is going to need a lot more energy as they become a highly developed nation.
It probably would be hard to acquire more than 10% of the debt without the market figuring out what was going on and driving the price of the bonds up. However, I think there is value in pursuing the idea even if it is only for $1B in debt.
If the debt is really distressed (and the current price isn't some interest rate hike, high yield, thin trading tomfoolery) then it might be possible to acquire $3B or $4B without anyone noticing something was going on. Everyone on the other side of the transaction would just be glad to be rid of the risk. I think It would take months to accumulate that much, but the more distressed people believe CHK is the easier it would be to execute.
I know that Lawler said he wouldn't be raising capital by selling stock common stock it seems to me that a debt for equity deal could be beneficial.
The idea would be to buy the debt on the open market at 1/4 to 1/3 its face value and then immediately issue common stock (in a private placement) to pay for it.
For example, with CHK at $4 (to make the math simple) and the debt trading at 33c on the dollar then CHK could buy $3B of face value of debt for 250M shares. It would be like buying the face value of the debt with shares valued at $12 per share. Similarly, $6B in debt could be retired for 500M shares.
No doubt that this would be significant dilution of the common shares, but it also could be a significant reduction in the outstanding debt. A trade-off to be considered?
I think two separate things are getting mixed in this discussion.
1) The debt exchange is just that. All unsecured debt holders are being offered to exchange their instruments for a 2nd lien (superior claim to assets than unsecured debt they currently are holding) at above market exchange rates. Evercore is likely leading this effort.
2) Speculation about assets sales. So, IF there were to be an asset sale then all debtors could claim AFTER bankruptcy that it was some sort of sweatheart backroom deal that robbed them of assets that should belong to them or could have given the company additional revenue to forestall the bankruptcy. So. Evercore can help with this by performing a third party analysis of the value of the deal and 'certifying' it to be a arms length transaction at fair market value at the time of the transaction.
Number 2 would be very important, for example, if LNG wanted to buy some leases of it's own and then bought them from CHK. Since Icahn owns a large percentage of both companies the perception that the deal would be done in some way to benefit one or the other company would have to be dealt with before the transaction. This is where Evercore would come into play on CHK's side of the deal and likely some other adviser for LNG's side of the deal. It must all be done properly, but still does not stop anyone with an interest from claiming they were harmed by the transaction.
The question is really this. Is the company trapped by it's circumstances or can Lawler sustain it long enough for prices to recover?
He spun off SSE and a significant amount of debt associated with the drilling operations.
He sold $5.4B of assets right before the NG market started to tank.
He sold some JV assets (Tonkawa) to reduce dividend payouts
He renegotiated a major pipeline deal to reduce CHK's cost of bringing product to market.
He renegotiated CHK's line of credit to include the possibility of issuing $2B in junior debt
He has cut the dividend to preserve cash
He has trimmed the staff to reduce expenses
He hasn't cut back on capex nearly enough to match the market conditions. So he either failed to correctly assess the market situation or he could not stop the spending rapidly enough.
He had an objective to sell about $1B in non-core assets this fall which he has failed to do so far, and recently indicated that if he did pull it off it would be more like $300M.
I think Lawler has done reasonably well, but his failure to cut back spending quickly is surely his biggest mistake and has led to a lot of speculation that CHK's business model is somehow fundamentally flawed. So flawed in fact that a seasoned and respected oil executive who has had many significant accomplishments while leading CHK cannot surmount the bad hand he was dealt by Aubrey McClendon.
So, I think that is the crux of the issue in a nutshell.
I think Lawler will now position to company to last as long as it can. How long this might be depends greatly on circumstances beyond his control. I do think that the Street is not investing any time in understanding what a minimal capex spend approach would mean for CHK.
CHK recently renegotiated their credit line to include the possibility of issuing $2B in junior debt.
So, if CHK finds it necessary to do that then about $11B of unsecured debt becomes junior to the $2B.
If prices continue to remain low for oil and gas (gas is 70% of CHK's reveune but only about 50% of CHK's profit, leaving oil for the other 50% of profit), and
If CHK spends another $3B on capex next year (like they did this year), then
CHK will most certainly need to exercise the availability of the junior debt and thereby increase risk of default on the unsecured debt.
I don't think it is any more complicated than that. Taking on another $2B in debt would not be good for CHK as a company, for the $11B in bonds, or for the common stock. This concept seemed to suddenly crystallize yesterday and now it gives pundits a good reason to write articles and increase their click-through rates about how CHK is heading for BK. Indeed, the whole industry is heading for BK if things don't change.
CHK does not have to spend $3B in capex next year. They do have to spend some. They have contracts that require a minimum volume of business with their drilling partner (SSE), with their pipeline partners, and with their JV partners. I do not have a good number for what their absolute minimum would be. I think they only have to spend about $150M with their drilling partner, and their pipeline contracts are for carrying product to market, so even though they have a minimum payment they would need to spend it anyway to deliver their product.
CHK has not provided a production update for 2016. They were asked about it during the last conference call and they declined to answer (said it was not a topic for that day, but did not say when they would provide the update). They did say they were prepared to significantly reduce their capex spending.
The Street doesn't seem to believe this is possible or likely.