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Chesapeake (CHK) Issues Common Stock to Reduce Debt Burden

Zacks Equity Research

Chesapeake Energy Corporation CHK recently entered into a privately-negotiated agreement to issue a total of 250,721,554 common shares in exchange for senior notes and convertible preferred stock. This move is expected to help the company to strengthen its balance sheet.

Notably, at the end of second-quarter 2019, Chesapeake had a cash balance of only $4 million. On the other hand, its net long-term debt was $9,701 million, leading to a debt-to-capitalization ratio of 69.6%. The figure was way above the industry average of 40.4%.

Moreover, the company’s debt-laden balance sheet restricts its ability to gain capital from the markets while losing credibility among shareholders. Though the recent move of issuance of common stock to retire a portion of its debt dilutes equity, management’s focus to tackle leverage is appreciable.

 

The company intends to keep lowering the debt level through several techniques like divesting non-core assets, improving capital efficiency, optimizing capital allocation program and others. Among the resources sold, the most notable one is the $1.9 billion divestment of Utica Shale assets in Ohio during late 2018. These initiatives can further improve its financial flexibility.

Markedly, the common stock issuance represents 15.3% of the upstream company’s 1.63 billion shares outstanding as of Jul 31, 2019. These newly issued stocks will be exchanged for around $40 million in 5.75% convertible preferred stock, $155.8 million in 5.5% convertible senior notes due 2026, $112.7 million in 4.875% senior notes due 2022, $129.3 million in 5.75% senior notes due 2023 and $150 million in 8% senior notes due 2027.

Price Performance

Chesapeake has lost 12.9% year to date compared with the 14.6% decline of the industry it belongs to.

 

Zacks Rank & Stocks to Consider

Currently, Chesapeake has a Zacks Rank #4 (Sell). Some better-ranked players in the energy space are National Oilwell Varco, Inc. NOV, Dril-Quip, Inc. DRQ and NuStar Energy L.P. NS. While National Oilwell sports a Zacks Rank #1 (Strong Buy), Dril-Quip and NuStar Energy have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

National Oilwell’s 2019 earnings per share are expected to rise 100% year over year.

Dril-Quip’s 2019 earnings per share are expected to rise 131.8% year over year.

NuStar Energy’s third-quarter 2019 earnings per share are expected to gain more than 107% year over year.

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NuStar Energy L.P. (NS) : Free Stock Analysis Report
 
National Oilwell Varco, Inc. (NOV) : Free Stock Analysis Report
 
Dril-Quip, Inc. (DRQ) : Free Stock Analysis Report
 
Chesapeake Energy Corporation (CHK) : Free Stock Analysis Report
 
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