Chesapeake Energy (CHK) PT Slashed to $0.50/Share at UBS

UBS analyst William Featherston reiterated a Sell rating and slashed its price target on Chesapeake Energy (NYSE: CHK) to $0.50 (from $2.00) after updating near-term concern impacting the company. The analyst sees a de minimus value for the equity unless oil and gas rallies materially.

Featherston commented, "With CHK scheduled to report 4Q results and 2016 guidance on February 24, there have still been plenty of worries increasing downward pressure on its stock price and bonds. With oil and gas prices near multi-year lows and the inflection point when those commodity prices improve seemingly being pushed out to 2017 from prior consensus of 2H16, concerns over CHK's liquidity and solvency have increased particularly after it was disclosed earlier this week that it hired Kirkland & Ellis to strengthen its balance sheet. In fact, the concerns were so great that it prompted CHK to disclose it "currently has no plans to pursue bankruptcy."

Commenting on liquidity, the analyst said, "We expect CHK's cash position to decline from $1.75bn at 9/30/15 to $970MM at YE15. CHK also has a $4bn undrawn secured credit facility, leaving it with $5bn in liquidity. But we expect this liquidity to erode quickly given: 1) $500MM 3.25% note maturing on 3/15/16 (trading at 86 cents on the dollar); 2) a credit facility redetermination in April; 3) a $302MM note maturing on 1/15/17 (trading at 29 cents) & another $453MM maturing on 8/15/17 (trading at 22 cents); 4) a potential $439MM litigation risk from a July 2015 ruling it is appealing. And assuming '16 capex of <$1bn (down 70% YoY & well below consensus of $2.5bn/yr), we project a $1bn per annum FCF deficit. We estimate CHK is on a path to chew through $3.9bn of liquidity, and risks having its credit facility reduced and business impaired from under-investment."

Commenting on next steps, the analyst said, "Given most shales are uneconomic at current prices, asset sales will be challenged. Our pipeline analyst views it as unlikely that WMB would renegotiate onerous midstream contracts (estimated cost to CHK of $1.2 billion/annum). Thus, a possible option is a material debt restructuring which would lead to a significant further reduction in its remaining equity value. CHK also could issue junior lien debt of up to $1.6 billion, which would reduce its credit facility borrowing base proportionately."

For an analyst ratings summary and ratings history on Chesapeake Energy click here. For more ratings news on Chesapeake Energy click here.

Shares of Chesapeake Energy closed at $1.78 yesterday.

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