In a recent move intended to keep its $4 billion credit line open, Chesapeake Energy Corp. offered most of its assets including real estate, natural gas fields, and various securities, as collateral in the event of a default. Chesapeake’s lenders accepted the offer, causing the company’s stock price to jump nearly 34% on Tuesday. The stock is still down about 60% since last year, but analysts believe that the oil price has bottomed out, which should prove to be very beneficial for Chesapeake’s recovery.
The rapid increase in the stock price, which jumped 61% in two days earlier this week, indicates that analysts did not consider the bank’s decision to accept Chesapeake’s proposal to be a certainty. Chesapeake has nearly $10 billion in debt, which gave investors reason to doubt the company’s solvency. However, the company’s lenders have confidence that Chesapeake will make it out of this crisis in good standing as evidenced by their acceptance of the proposal. Citigroup Inc, in a letter to its clients, explained that the agreement is meant to help Chesapeake continue its operations in this “low commodity price environment.”
Chesapeake’s proposal to offer various assets as collateral was a bold but necessary move. The credit line will be used, among other things, to help the company manage its debt obligations. It is important for the company to keep a close eye on its levels of debt because it could easily become swamped under its obligations, which could eventually lead to liquidity issues. Chesapeake made it clear that its focus is on retiring it’s 2017 and 2018 bonds, which CEO Doug Lawler calls “maturity management.” Ensuring that its $4 billion credit line remained open was a huge win for Chesapeake’s continued existence.
Article written by HEI contributor Timothy McNally.