Chesapeake Energy (NYSE:CHK) soared 16.5% in today’s trade after moving to tamp down immediate concerns about its viability, but Bloomberg analyst Stephen Cutter says fundamental issues continue to threaten its longer-term outlook.
CHK said today that its lenders had agreed to loosen some restrictions on its ability to incur debt, it was securing an additional $1.5B loan package from a group of banks, and it plans to buy back $700M of notes due in 2025 at discounted prices and swap other bonds into new securities.
“This helps from a leverage standpoint, but it doesn’t change the fundamental issue that many oil and gas producers in North America face: the economics of fracking are questionable,” Cutter says.
CHK needs ~$60/bbl oil prices and $2.75/MMBtu natural gas prices in order to maintain production and generate free cash flow, according to Cutter; currently, oil trades at ~$58/bbl and gas at $2.38/MMBtu.
Cutter says CHK’s efforts to delay repaying debt are fairly similar to moves made by other distressed energy companies following the sector’s downturn, and notes “the vast majority of those companies ended up going bankrupt anyway.”