If it wasn't already clear from Chesapeake Energy's (CHK) falling stock price and downgrades to its corporate credit rating, the company has balance sheet concerns.
As a new Real Money feature, we will periodically look at analyst ratings and place them in one of two categories: "Thanks for Nothing" or "Thanks for Something."
On Monday, John Freeman of Raymond James downgraded the Oklahoma-based oil and gas producer to Underperform from Market Perform based on a "weak natural gas price forecast and balance sheet concerns." Shares of the company fell 77.3% in 2015 and it was one of the worst-performing stocks in the S&P 500. Given that Chesapeake Energy's troubles have been widely telegraphed, Freeman's downgrade of falls into our "Thanks for Nothing" category.
The downgrade is not a surprise to anyone who has been following Chesapeake Energy or the broader energy market. What is surprising is that the company wasn't downgraded sooner. The price of oil has been trading below $50 a barrel since July 2015 and has been falling for much longer.
Freeman acknowledged that the outcome of the company's recent effort to exchange notes coming due in 2017 and 2018 was "relatively weak." Approximately $385 million worth of notes due in 2017 and 2018 participated in the exchange. According to Freeman's calculations, the company has $2.5 billion in debt due by the end of 2017.
However, while the outcome of Chesapeake Energy's note exchange may have been weak, the fact that the company had to resort to this measure at all is a sign of trouble.
Second-lien loans are perceived like scarlet letters," Tim Rezvan, an analyst at Sterne Agee wrote in a note released in November, just before the company announced the offering. Shares of the company fell 29% since Revzan's warning.
With that in mind, we'd like to thank Freeman catching up with what the rest of the market has already known.