Blame Chesapeake Energy Woes Finances
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Chesapeake Energy Corp (NYSE: CHK) has had some really bad luck lately. The investigation by the SEC of Mr. McClendon’s internal borrowing has not helped but there are a couple economic circumstances that have added to the companies struggles that we need to understand as investors.
The Sad State of Natural Gas Prices
The low prices first drove the company into a financial loss in the first quarter of 2012 and halved the value of the stock. The company may run out of money by 2013 if things don’t change. In the past, business grew with the shale oil discoveries. But with new technology to extract the oil, this sudden new huge reserve sent U.S. prices down to what is equivalent to about $20 a barrel, when the global price of a barrel is $120. So the company has struggled.
It is not like Chesapeake is the only oil company struggling with these prices, it is just that it was so top heavy into it. Other companies have also struggled. ExxonMobil (NYSE: XOM) cut the number of rigs for what it calls “unconventional” gas and oil in the US because of the weak North American natural gas prices. The reported weaker-than-expected earnings for the first quarter of 2012, as the benefit of higher oil prices was more than offset by a fall in production and weak natural gas prices.
Chevron (NYSE: CVX) is another example. In the Q1 of 2012 it managed to beat profit estimates by a penny while production fell and prices rose. The weak natural gas prices in the U.S., have contributed to the company’s struggles this year. The boom of shale plays has pushed down prices, putting pressure on big oil and gas companies’ bottom line.
Serious Financial Woes
So it is not just Chesapeake but the fact that it was heavily invested in this field has hurt its bottom line and the credit agencies have not been kind to the company as of late.
Credit Agency Fitch's outlook for the company is negative which means there’s a good chance Chesapeake’s rating will be cut over the next 12 months. Here is what Fitch sees for the company and it does not look pretty. Fitch estimates that a $10 billion gap between cash flow from operations and capital spending and leasehold acquisitions will put pressure on the company’s credit quality. The main problem: Chesapeake will be “sharply cash flow negative over the next three years.” one also has to consider that it has maturities coming soon of about $2 billion between now and 2015.
With depressed natural gas pricing, a real serious potential for a shortfall or delay in some of the expected proceeds from the remaining planned asset sales this year could happen. Chesapeake is in serious financial turmoil right now and a lot of that is due to the state of its industry. It does not look like a bright light at the end of the tunnel is anywhere to be found soon.
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