A prolonged slump in commodity prices is rattling the
market for junk-rated energy debt, but few firms have been hit harder than Chesapeake
Energy Corp. Half of the 10 worst-performing junk bonds over the past week
were issued by Chesapeake, the Oklahoma City company that is the second-largest
U.S. natural gas producer behind Exxon Mobil Corp. The company, a
former Wall Street darling once headed by investor Aubrey McClendon, has
sold billions of dollars in debt to help finance oil and gas purchases in
recent years.
A few years ago, with oil prices near $100, Chesapeake was a
favorite among debt investors because the sheer volume of the company’s
issuance made its bonds relatively easy to buy and sell without significantly
moving the market price. Its share price briefly exceeded $60 during the
energy-price spike of mid-2008. But lately there have been many more investors
seeking to sell the company’s shares and bonds than to buy them, forcing down
prices and intensifying fears among analysts and traders that the worst could
yet be ahead. Its shares fetch less than $5 and many of its bonds between 30
and 40 cents on the dollar, down from close to 80 cents just three months ago.
The sharp decline in oil and gas prices this week has
renewed concerns among investors that Chesapeake, and other U.S. energy
producers, will be unable to repay bondholders if commodity prices don’t
recover soon. It isn’t an unusual predicament in the energy bust. Bonds from
other low-rated producers have fallen, too: Through Wednesday, Oasis
Petroleum Inc. bonds are down 9.1 cents over the past week to about
78 cents on the dollar,and bonds from EP Energy LLC are down 10.5
cents to 67, according to data from Market Axess Holdings Inc. A
bond from California Resources Corp. is trading around 45 cents,
down about 15 cents since the beginning of December.
Production firms aren’t alone. Bonds from electric utilities
including Dynegy Inc., AES Corp. and NRG Energy Inc. have
declined in recent days, reflecting concerns that falling natural-gas prices
will drag down electricity prices as well. Through Wednesday, a Dynegy bond was
down 5.8 cents on the dollar over the past week to 88.5 cents, an AES bond was
down 3.1 cents to 87.9 cents and a bond from NRG Energy was down 4.2 cents to
about 87 cents.
Looking to reduce debt, Chesapeake is offering investors a
bond swap for up to $1.5 billion of new debt. Investors who agree get hit with
a principal reduction but also get a lien on the company’s assets, increasing
the odds they will ultimately get much of their money back. It is a tactic
analysts say more companies likely will be forced to attempt in coming months.
Some have already completed similar deals, such as SandRidge Energy Inc. and Halcon
Resources Corp.
Many analysts don’t think it will be enough. In a report on
Dec. 3, a day after Chesapeake’s exchange offer was announced, analysts at
research firm CreditSights said they expected the company to file for bankruptcy
in 2018 barring a significant improvement in commodity prices. They changed
their view on Chesapeake bonds to “sell” from “hold,” and reaffirmed the “sell”
recommendation in a note on Wednesday.
The company has been in the spotlight before. In 2013 Mr.
McClendon, its longtime chief executive, left the company, citing
“philosophical differences” with the board. Some investors questioned the
company’s acquisition strategy and others its standards, including permitting
Mr. McClendon to borrow against his stock, an episode that ended when a margin
call forced share sales. Mr. McClendon has since founded a new venture,
American Energy Partners LP.
Not all analysts are downbeat. Jason Wangler, managing
director at Wunderlich Securities, still has a “buy” rating on the company’s
stock and a price target of $13. The debt exchange offer should reduce the
company’s debt load, giving it more flexibility to weather the tough
oil-and-gas environment.
Mr. Wangler said the company still had some options,
including selling assets when energy prices recover, a strategy management had
been pursuing before prices dropped. But others doubt energy-company investors
will get out unscathed. The losses in the junk-bond market are “a
precursor of a period of substantial defaults,” said Matt Freund, chief
investment officer and portfolio manager at USAA Mutual Funds, which has been
underweight bonds from junk-rated energy producers.
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