Chesapeake Energy Loses Its Magic M&A Touch
Some trends in the energy stock trade have a history of consistency, and ones of those trades has been Chesapeake's proven ability to generate positive trading momentum for its shares by announcing deals that raise cash to work off the mountain of debt it has amassed -- the oft-quoted twice the level of debt of Exxon Mobil (XOM) for a company 27 times smaller than the world's largest oil company.
It looks like the low natural gas price environment and the ceaseless talk of a "one handle" futures quote (down into the $1s on the one-month futures contract) as being fated in the energy market, may now hold the trump card when it comes to Chesapeake's lack of market momentum.
Natural gas was down another 3% on Tuesday to just above the $2 mark, a day after Chesapeake announced $2.6 billion in asset deals on the way to the $10 billion to $12 billion that the company plans to raise this year to put to rest concerns that its funding gap is too large to bridge.
The Chesapeake Energy M&A magic trade of the past didn't mean the long-term outlook for Chesapeake had changed, but it did show that when McClendon needed to go to the well to prove that his large collection of assets would be rewarded by strategic buyers, he usually didn't back empty.
Wall Street's reaction to Monday's deal was roundly positive, too, and while Chesapeake shares rallied in after-market trading, it was about as short-lived as a rally could be.
The market sell-off on Tuesday also made it a bad day for any company to attempt to gain momentum. Back in early January, when Chesapeake announced a joint venture in the Utica shale, it caught a good day and rallied twice as much as the market. And that was for a deal that it had really announced three months previous to adding the specific buyer's name in January.
It's not down by half of the market loss on Tuesday, though. In fact, Chesapeake shares were down more than twice as much as the S&P 500 and even more than the broad energy sector decline of 2%, with its shares declining by 3% in afternoon trading.
There are details within the trio of deals announced on Monday that constant critics of the company can point to as more signs of financial engineering. Chesapeake signed another volumetric production payment -- or as the rating agencies and analyst Phil Weiss of Argus Research define it, "debt by another name."
The issuing of more preferred shares was also in line with the "financial engineering and off balance sheet debt," that Weiss said has has always been among Chesapeake's primary monetization strategies and should be viewed by investors with a raised eyebrow.