Pay Close Attention to Chesapeake Energy Corporation (CHK)

Page 1 of 2

On July 5, Chesapeake Energy Corporation (NYSE:CHK) announced that it has entered into a definitive agreement to sell its assets in the Northern Eagle Ford Shale and Haynesville Shale to EXCO, a subsidiary of

EXCO Resources Inc (NYSE:XCO). In return for the sale, Chesapeake would receive approximately $1 billion, of which approximately 90% will be received upon closing. The transaction is expected to close in the third quarter of the ongoing fiscal year. Other interested parties were

SandRidge Energy Inc. (NYSE:SD) and Plains Exploration & Production Company (NYSE:PXP).

Some background

Chesapeake Energy Corporation (NYSE:CHK)

The mere sale of assets by Chesapeake Energy Corporation (NYSE:CHK) is no indication of any imminent problem. The company has been divesting assets aggressively in the last year. Since Carl Icahn, the activist investor, has bought a 7.56% stake in the company (which he later upped to 8.9%), he has been imploring various strategies to reduce spending and cut debt. He believes, and rightfully so, that the company’s massive level of debt has a strong negative impact on its equity value. At the end of 2012, for example, the company had a cash shortfall of about $10 billion. This has caused shares to remain depressed. As of the most recent quarterly report, Chesapeake Energy Corporation (NYSE:CHK) has a total of $24.5 billion of total liabilities, of which $13.5 billion is classified as long-term debt and $5.8 billion is short-term debt. For comparison, the company’s total market cap is only $13.8 billion, roughly a half of its total liabilities. This is why a debt reduction plan, like the one outlined by Icahn, is definitely in place.

Other troubled rivals

The danger of accumulating debt in boatloads isn’t unique to Chesapeake Energy Corporation (NYSE:CHK); debt has been troubling a few of its peers in the gas and oil industry. All of these companies possess massive debt and similarly massive assets. When pushed against the wall to meet pending bond payouts, such companies are likely to dispose of otherwise lucrative assets. This will hinder the profitability of these companies and will have a direct impact on shareholders.

You can try to spot the next troubled candidate by carefully reviewing balance sheets. Take SandRidge Energy Inc. (NYSE:SD), for example. This energy company has equity valued at $2.9 billion with total debt almost twice that amount. With assets worth almost $10 billion, SandRidge’s shareholders face a possible liquidation that will hurt the company’s share price.

Another company worth paying attention to is Plains Exploration & Production Company (NYSE:PXP). The company’s equity is currently worth only $6 billion, while the company owes $11.5 billion to bond-holders. With assets totaling $17 billion, it seems likely that the company will go through some kind of liquidation of assets in the near future.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!