Chesapeake Energy (CHK) may ultimately prove to be "a survivor" amid the carnage caused by prolonged low energy prices, but an analyst team at Jefferies still says sell.
Jefferies resumed coverage of the troubled Oklahoma-based oil and gas producer Monday with a $3 price target, and an Underperform rating. The last note Jefferies issued was in February, just weeks after the company had to fight rumors that it was preparing to file bankruptcy. At the time, Jefferies had an Underperform rating on Chesapeake and a $2 price target.
Shares of Chesapeake were up nearly 4% after Monday's open to $4.65 as the price of crude oil also rallied.
While fortunes may have changed for Chesapeake since the tenuous days earlier this year, it's not enough for Jefferies.
The risk of default has been reduced but "overall obligations remain very high, volumes are declining, asset quality looks subpar and significant further equity holder dilution is likely," Jonathan Wolff of Jefferies wrote in Monday's note.
In the last three months, Chesapeake has issued 104.5 million new shares and reduced its debt by approximately $549 million through various debt-for-equity exchanges. While Wolff acknowledges that the measures have improved Chesapeake's balance sheet, he points out that it has $1.3 billion of potential liabilities coming due in 2017. (Of the total, $675 million are putable converts.)
The Jefferies team points out that Chesapeake's liquidity continues to be "constrained." As Real Money reported in April, Chesapeake was able to maintain its $4 billion borrowing base but it had to pledge nearly all of the company to do so. Even worse, Wolff points out, Chesapeake's liquidity has been decreasing over the last few quarters and now stands around $3 billion by Jefferies' measure.
While Chesapeake's darkest days may be behind it, Jefferies isn't ready to warm up to the company.
"We think the cost of survival points to very significant further additions to the share count, greatly diluting the equity holder (i.e. exchanges, direct share offerings)," Wolff wrote. "The end game looks likely to be a going concern entity at a lower share price."
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