The economy is fine, really. Keep buying those stocks. Prosperity is just around the corner. From Wolf Richter at wolfstreet.com:
The shares of Chesapeake Energy, second largest natural-gas driller in the US, crashed nearly 10% today, to $9.29, the lowest price since August 2003, down nearly 70% since oil began to plunge a year ago. The company’s $1.1 billion of 5.75% notes fell to an all-time low of 84.88 cents on the dollar. And its 4.875% notes dropped to 81.25 cents on the dollar, from 86 last week, according to S&P Capital IQ LCD.
All this in the wake of its announcement that it would suspend its dividend for the first time in 14 years. It’s trying to conserve cash, and that dividend costs $240 million a year. It’s dumping assets as fast as it can, including some Oklahoma fields that will save it another $75 million a year in preferred dividends. It’s cutting operating costs and capital expenditures. It’s trying to stay alive.
It has been cash-flow negative in 22 of the past 24 years, according to Bloomberg.
The only thing surprising is that it took so long, that Wall Street kept funding its cash-flow negative operations and dividends for all these years.
Chesapeake used to be mostly a natural gas producer. But the price of natural gas plunged over five years ago and has remained below the cost of production for most wells for much of that time. The only saving grace was that these wells also produced natural-gas liquids and oil, which sold for much higher prices. As its natural-gas business model collapsed, Chesapeake began chasing after oil-rich plays. But a year ago, the price of oil collapsed.
Among natural gas drillers, Chesapeake isn’t in the worst shape. Much smaller Quicksilver Resources filed for Chapter 11 bankruptcy in March. It listed $2.35 billion in debts and $1.21 billion in assets. The difference has been forever drilled into the ground. Stockholders got wiped out. Creditors are fighting over the scraps.
Then there’s natural gas driller Samson Resources. It was acquired by a group of private equity firms, led by KKR, in 2011 for $7.2 billion. Since then, Samson has lost over $3 billion. When Moody’s downgraded Samson to Caa3 in March, it pointed at, among other things, “chronically low natural gas prices” and invoked “a high risk of default.” Samson warned it might have to resort to bankruptcy to restructure its debt.
At the time, a JPMorgan-led group, which holds a $1 billion revolving line of credit, granted Samson a waiver for an expected covenant breach to avert default. But the group reduced the size of the revolver. Last year, the same group had already reduced the credit line from $1.8 billion to $1 billion and had also waived a covenant breach.
“Liquidity death spiral,” is what S&P Capital IQ called this principle by lenders to whittle down the size of the loan as the company runs deeper into trouble, as I wrote at the time. It eventually ends in bankruptcy.
To continue reading: Debt Is Tearing up the Fracking Revolution
