Stressed Out: Chesapeake Energy's Credit Deal Buys Time ... but Little Else

 | Apr 12, 2016 | 11:40 AM EDT
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This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.

Chesapeake Energy (CHK) may have been granted breathing room in its new borrowing base redetermination but it is too early for the company -- and shareholders and creditors -- to breathe a sigh of relief.

On Monday, the Oklahoma-based oil and gas company announced that it entered into a third amendment on its senior secured revolving credit agreement with MUFG Union Bank. The market rejoiced as shares of Chesapeake Energy closed up 19% on Monday and continued rallying as much as 30% Tuesday morning to about $5.60.

The company, which is a member of Real Money's "Stressed Out" list, was able to maintain its borrowing base at $4 billion and was granted an extension on its future redetermination to June 2017 from October 2016.

As analysts were expecting Chesapeake Energy's borrowing base to be reduced, the borrowing base redetermination has largely been viewed as positive news. However, to get such favorable terms, the company had to pledge "substantially all" of its assets, according to the company's filing with the Securities and Exchange Commission on Monday.

The new amendment provides short-term relief for the company, which may allow it to weather the era of lower-for-longer energy prices, but the company still has a debt load nearing $10 billion that it must contend with. Almost 30% of that debt comes due in the next two years.

Put simply: Chesapeake Energy pledged nearly everything to get $4 billion in credit while it has nearly $10 billion debt outstanding. Because much of Chesapeake Energy's outstanding debt is unsecured, the chance that bondholders can recoup anything in the event of a restructuring is much riskier.

"The amendments cited in the press release do seem to provide the Company a good deal of liquidity for 2016, but we note that 2017 is when the much greater funding requirements potentially come into play," David Epstein of CRT Research wrote in a note on Monday.

Chesapeake has $1.9 billion in notes coming due in 2017, according to its 10-K filing with the SEC: $329 million comes due in January, $1.1 billion can be called in May and $453 million matures in August. In 2015, Chesapeake Energy reported $12.6 billion in revenue, which was offset by $13.5 billion in operating expenses (not including a reported impairment on oil and gas properties totaling $18.2 billion.) If 2015 is any indication, absent a robust recovery in energy prices, Chesapeake Energy would have difficulty satisfying its 2017 debt obligations. Unless, of course, it taps its credit facility.

In addition to affirming Chesapeake Energy's borrowing base, the new amendment grants the company some relief on its covenants. Its first-lien-secured-leverage ratio, net-debt-to-capitalization ratio and interest-coverage ratios have all been suspended until Sept. 30, 2017. Starting in December 2017, the company will be required to maintain a leverage ratio of 3.5x, which will be required to fall to 3.0x soon thereafter.

For now, Chesapeake Energy gets to live another day but its problems aren't far behind it.

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

Stressed Out: Introducing Real Money's Distressed Index

Stressed Out: AK Steel Leads Surging U.S. Steelmakers

Stressed Out: Sprint Is Collapsing Under the Weight of Its High-Yield Debt

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