Chesapeake Dips, Shares 'Going Concern' Warning



Chesapeake Dips, Shares 'Going Concern' Warning
Chesapeake said it may not be able to continue as a "going concern" if depressed oil and gas prices persist.

(Bloomberg) -- Chesapeake Energy Corp. tumbled after the U.S. natural gas producer posted a wider-than-expected third-quarter loss and said it may not be able to continue as a “going concern” if depressed oil and gas prices persist.

The Oklahoma City-based company fell as much as 17 percent, the most in more than three years. It reported an adjusted loss per share of 11 cents Tuesday, compared with the average analyst estimate of 9.5 cents. Chesapeake bonds also fell.

If oil and gas prices remain low, the company may not be able to comply with its leverage ratio covenant during the next year, “which raises substantial doubt about our ability to continue as a going concern,” Chesapeake said Tuesday in a quarterly filing.

Chesapeake is trying to dig its way out from under a mountain of debt accumulated in the previous decade during the initial fracking boom under its late co-founder Aubrey McClendon. The company’s borrowings totaled $9.73 billion as of Sept. 30, up from $8.17 billion at the end of last year.

“With massive debt, leverage is not going down every quarter you continue to outspend,” Neal Dingmann, an analyst at SunTrust Robinson Humphrey Inc., said by phone. “What is leverage going to look like next year and how are you going to address it internally or externally? That’s the story.”

Though Chesapeake plans to reduce spending next year, its third-quarter capital expenditures rose 16 percent from a year earlier as it completed more wells. The producer is maintaining full-year 2019 budget guidance. Chesapeake cut its outlook for 2020 spending by almost a third as it looks to achieve free cash flow amid a broader slowdown in the shale patch.

The task facing Chief Executive Officer Doug Lawler is being made even harder by a glut-driven slump in gas prices. Shale investors, meanwhile, are pushing management teams to generate free cash flow after years of high spending that generated massive output gains but disappointing returns.

Chesapeake said it expects to generate free cash flow next year. It predicts flat oil output for 2019 using 10 to 13 rigs with projected capital expenditures of $1.3 billion to $1.6 billion.

Shareholders and analysts may look for more color on the company’s earnings conference call about Chesapeake’s plans to reduce debt, including potential sales of shale drilling rights in Louisiana or Appalachia. Steps the company has taken so far include a $588 million debt-for-equity swap announced in September. Chesapeake said Tuesday that it has restructured gas gathering and crude transportation contracts in South Texas and the Brazos Valley to improve future returns.

“They need to walk people through how they plan to get free cash flow,” Sameer Panjwani, an analyst at Tudor, Pickering, Holt & Co., said by phone. “A big part of it could be asset sales. They’ve talked about it before on a high level, but how far along are they in some of these processes?”

Chesapeake fell 14 percent to $1.3501 a share at 9:03 a.m. in New York. The company’s 8 percent bonds due in 2027 fell 2.75 cents on the dollar to 64.25 cents as of 8:32 a.m. in New York, according to Trace.

To contact the reporters on this story:
Christine Buurma in New York at cbuurma1@bloomberg.net;
Kriti Gupta in New York at kgupta129@bloomberg.net;
Rachel Adams-Heard in Houston at radamsheard@bloomberg.net

To contact the editors responsible for this story:
Simon Casey at scasey4@bloomberg.net
Christine Buurma, Joe Carroll



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