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. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

The 10 Most Expensive Cruise Ships in the World

The 10 Fastest Supercomputers in the World

The 10 Best Countries for Doing Business 2015

6 Most Expensive Fruits In The World

10 Worst Airlines in the World

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!