Stressed Out: Chesapeake & 3 Other E&Ps Face a Tough 2016

 | Jan 26, 2016 | 10:30 AM EST  | Comments
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This article is part of a Real Money series on 20 distressed companies investors should consider adding to their distressed watch list.

It's no secret that energy companies have been hit hard as the price of oil has fallen and stayed low over the past year. Many companies have shed 70% or more of their stock price. They have cut or suspended dividends, laid off workers, sold assets and restructured debt in an effort to shore up liquidity. 

No doubt, some oil and gas companies will find their way out of the current tumult but others are faring much worse as they continue to cut away at themselves to save cash. Real Money has picked a few such companies to put on its "Stressed Out" index. Here we'll look at four E&P's that have made the watch list. In an upcoming piece, Real Money will be looking at other companies that have also been directly hurt by low energy prices.

Chesapeake Energy (CHK): On Friday, the Oklahoma-based company announced that it was suspending its preferred dividend. In July, the company announced that it was suspending the dividend on its common shares. The $170 million the company expects to save from this latest move will be used to ease its debt burden by taking advantage of the deep discounts at which many of its bonds trade. (The price of Chesapeake Energy's bonds have fallen sharply in the fourth quarter of 2015, and many trade for less than $0.40 on the dollar.) 

Indeed, Chesapeake Energy has a significant debt load -- standing at nearly $11 billion -- that it has been working to get under control. In December, the company issued an exchange offering with preference given to its notes coming due in 2017 and 2018. The new notes mature in 2022. Despite its efforts, Chesapeake's ability to service its debts remains questionable as the company has posted negative earnings in recent quarters. While the company has a $4 billion credit facility to draw from, taking on debt to cover debt is not a strategy that gives investors confidence. 

Southwestern Energy (SWN): This stressed out Oklahoma-based oil and gas company has already had a rocky beginning to 2016. The company announced Bill Way as the new CEO at the beginning of the year following the retirement of Steve Mueller. Soon thereafter, the company announced, via a filing with the Securities and Exchange Commission, that it was laying off 1,100 employees -- roughly half its workforces. The company expects that most of the layoffs will occur by the end of the first quarter and that it will realize $150 million to $175 million in savings annually, after accounting for severance payments. The move follows layoffs the company announced in 2015. 

While Southwestern Energy does not have any significant debt maturities coming due until 2018, its ability to weather the near-term storm is questionable in the current climate. An analyst team at Morgan Stanley led by Drew Venker characterized the layoffs as "the right move" but "the start of a very painful path" in a note released Thursday. By Venker's calculations, Southwestern Energy's net debt to EBITDA (earnings before interest, taxes, depreciation and amortization) projection for 2016 is 6.3x.

As of the company's filing with the SEC last week, it had not yet finalized its capital budget for 2016 and its oil rigs are sitting idle.

The Deal: Chesapeake Energy Noteholders Face 'Prisoner's Dilemma'

 Ultra Petroleum (UPL): When most companies face concerns about meeting their debt obligations, they code their language or make adjustments to their earnings figures, which make it difficult to properly determine how levered they truly are. With that in mind, you almost have to give Texas-based Ultra Petroleum credit for just coming out and saying it in its third-quarter filing with the SEC:

"If over the next twelve months, crude oil and natural gas prices remain at current levels or fall to lower levels, the Company is likely to generate lower operating cash flows, which would make it more difficult for the Company to remain in compliance with all of its debt covenants."

The company has $2.76 billion in debt, $62 million of which is coming due in March 2016, as of its third-quarter filing. It also has only $25 million in cash as of the end of the third quarter. It's ability to cover this issue with cash from operations is questionable as the company already accessed its credit facility to finance capital operations.

Encana (ECA): Shares of this Canadian-based company fell more than 70% in the last year amid lower-for-longer oil prices. Earlier this month, an analyst team at Morgan Stanley led by Benny Wong lowered its rating on Encana to Equal Weight, citing a lowered commodity outlook and leverage concerns. By Wong's measure, the company's net debt to cash flow is 5.1x, compared to its peers, which average 3.8x. Its position is unlikely to be much improved even if it is successful in shedding non-core assets, Wong added.

The saving grace for Encana, and other names on this list, will no doubt be raising energy prices. Unfortunately, despite a few up days this year, a sustainable energy rally has yet to be recorded.

For more on Real Money's 20 distressed companies to watch:

Stressed Out: Introducing Real Money's Distressed Index

Stressed Out: 5 Steelmakers to Put on Your Distressed Watch List

Stressed Out: Is Avon Using Vanishing Cream on Its Cash?

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