|Bid||0.7050 x 3000|
|Ask||0.7060 x 2200|
|Day's range||0.6850 - 0.7145|
|52-week range||0.6400 - 3.5700|
|Beta (3Y monthly)||2.46|
|PE ratio (TTM)||N/A|
|Earnings date||5 Nov 2019|
|Forward dividend & yield||N/A (N/A)|
|1y target est||1.61|
(Bloomberg Opinion) -- Greetings, readers. In the spirit of some of my fellow Bloomberg Opinion columnists (with last names like Bernstein, Levine, and Sutherland) I’m going to write an occasional compilation of short items about topics I care about. Mine will post on Fridays and this is the first installment.I Remember AubreyThe unsurprising recent news that Chesapeake Energy Corp. might not survive as a “going concern” if gas prices don’t improve got me thinking about its late, flamboyant founder, Aubrey McClendon. McClendon was the original shale cowboy; Forbes once called him “America’s most reckless billionaire.” Indeed, who can forget the time he sold his own company a collection of historical maps for $12.1 million? (He was later forced to buy them back as part of legal settlement.) My colleague Liam Denning and I were recently recalling the incident and he emailed me Chesapeake’s 2009 proxy. It contained the company’s explanation for the purchase:These maps have been displayed throughout the Company’s headquarters for a number of years, complementing the interior design features of our campus buildings…Our employees and visitors appreciate the maps’ depiction of the early years of the nation’s energy industry…In addition, the collection connects to our Company’s everyday use of mapping in our business of exploring for and developing natural gas and oil.As Liam told me: “The rationale for buying the art is a work of art in itself”….Maxed OutAnother week, another brutal takedown of the Boeing Corp., this time in the New Yorker. Titled “The Case Against Boeing,” the article marks the 1996 merger of Boeing and McDonnell Douglas as the moment “when Boeing went from being led by engineers to being led by business executives driven by stock performance.” The author, Alec MacGillis,(2) recounts an anecdote told to him by a union executive named Stan Sorscher, who was trying to explain to a stock analyst in Seattle that “bottom-line business models did not apply to building airplanes.”According to Sorscher, the analyst replied, “You think you’re different. This business model works for everyone. It works for ladies’ garments, for running shoes, for hard drives, for integrated circuits, and it will work for you.”Boeing's well-documented cost cutting in building the 737 Max would certainly suggest that Sorscher was right – and that the desire to “maximize shareholder value” was at the root of what went wrong. (Flawed flight-control software made the 737 Max responsible for two fatal crashes.) If the Business Roundtable’s recent attempt to reduce the primacy of the shareholder is to mean anything, it has to mean that companies like Boeing will stop looking at the share price when it’s time to build a new airplane….Ka-chingI heard my first rendition of “The Christmas Song” this week; I’ll no doubt hear it 4,000 more times before we get to December 25. It’s said to be the most-performed Christmas song ever. Every year, after the first few hundred times, I always have the same question: How much does that one song generate for the estate of Mel Tormé, the great jazz singer who wrote it in 1945? It’s gotta be millions. Various (and possibly very unreliable!) websites speculate that $16 million to $19 million has flowed to Torme’s estate, but who knows…Crony CapitalismFor four years, the Republican Senate crippled the Export-Import Bank of the United States by refusing to confirm nominees for its board and its chairman. It was an ideological stance: They claimed that the bank, a federal agency which guarantees loans to boost exports, was practicing “crony capitalism,” favoring big companies over small businesses, and putting taxpayers at risk if the loans defaulted. U.S. exporters, they said, could get along just fine without it.But in May, the Senate finally confirmed President Donald Trump’s choice to be chairman, Kimberly Reed, as well as new board members. And guess what? As far as I can tell, the Ex-Im Bank is doing exactly the same thing in this administration as it did in previous administrations. In September, for instance, it approved a $5 billion loan — not a guarantee, mind you, but an actual loan — to finance a liquified natural gas project. The taxpayers are definitely at risk if this deal goes bust. And the main contractor for the Mozambique project is not some small business but a major oil company, Total S.A.I happen to be a big believer in the Ex-Im Bank. I think it helps create jobs in the U.S. To my mind, this $5 billion deal is a very good thing. Still, it’s hard not to be at least a little cynical about how pointless the Republicans “ideological” opposition turned out to be….Bye ByeThis was fun. Let’s do it again next week, okay?(1) MacGillis is an investigative reporter with the nonprofit news site, ProPublica. The article is a collaboration between the New Yorker and ProPublica.To contact the author of this story: Joe Nocera at firstname.lastname@example.orgTo contact the editor responsible for this story: Timothy L. O'Brien at email@example.comThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. His latest project is the Bloomberg-Wondery podcast "The Shrink Next Door."For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg Opinion) -- When a stock goes into free fall, one hope is that some acquirer out there will catch it. Sometimes, though, suitors come with their own complications. That brings us to EnLink Midstream LLC.EnLink operates gathering and processing pipelines and other oil and gas infrastructure across several onshore U.S. basins. In the summer of 2018, Devon Energy Corp., an exploration and production company, sold its stakes in various EnLink entities to Global Infrastructure Partners for just over $3.1 billion. After a subsequent simplification of EnLink, GIP owns 46% of the common units, now worth $1.2 billion.EnLink has been undone by weaker commodity prices. Earlier this month, Devon announced it had dropped the number of rigs operating in one of Oklahoma’s shale basins to precisely zero (how’s that for a coda to last year’s deal?). This confirmed a trend evident already in permitting and drilling data for the Anadarko basin, where just four companies account for the majority of activity; and, crucially, they have operations in other basins that are more competitive in terms of breakeven costs.The distribution yield on EnLink’s stock now scrapes 20% — on a par with the current yield on long-dated bonds of Chesapeake Energy Corp., which just issued a going-concern notice. There’s being paid to wait, as they say, and then there’s being paid to wait in that trash compactor from Star Wars.EnLink’s cash flow math is tight. Consensus forecasts — which have now had time to digest cost savings pledged on the latest earnings call — put Ebitda at $1.1 billion in 2020. Take off around $500-$550 million for cash interest and (much-reduced) capital expenditure, and that leaves about $550-$600 million versus current distributions of about $550 million. With Ebitda forecast to grow at just 1% a year through 2022, that tight squeeze won’t ease up. Wells Fargo & Co.’s analysts estimated in a recent report that, absent a change in distribution policy, current leverage of 4.2 times adjusted Ebitda could reach almost 6 times by 2025. By any rational measure, the distribution should be cut.The complicating issue is that EnLink’s leverage is compounded by more leverage at the GIP level in the form of a $1 billion term loan. Technically, it is separate from EnLink’s own finances. But as the company acknowledges in its own 10K filing, debt owed by an entity owning almost half the company plus its managing partner, and which is serviced by EnLink’s own distributions, is very much a risk factor. By my calculations, the loan requires roughly $80 million a year of EnLink distributions (GIP didn’t respond to requests for comment)(1). As of now, distributions amount to about $255 million. So, in theory, EnLink could slash its payout by about two-thirds and GIP could still service the loan.In practice, that would be a bitter pill to swallow. As it is, GIP’s common units in EnLink are now worth not much more than the value of the loan and way below the original investment. Cutting distributions would certainly help EnLink’s balance sheet; all else equal, a 67% cut would save enough cash to take leverage below 4 times adjusted Ebitda, in line with long-term targets. But this would almost certainly push the value of GIP’s stake even lower, at least in the near term. As Ethan Bellamy, analyst at Robert W. Baird & Co. Inc., put it to me:Does GIP leverage prevent EnLink from cutting the distribution and right sizing the ship? It wouldn’t be the first time we’ve seen parental leverage from a private equity sponsor lead to sub-optimal outcomes for the subsidiary public entity.On the other hand, if EnLink cuts and its price falls further, then GIP might be tempted to make an offer for the rest of the company in an effort to salvage things out of the public eye. Needless to say, a takeover premium on an even lower EnLink price would do very little to make up for the losses suffered to date. We are seeing this play out with Blackstone Group Inc.’s offer for another midstream company, Tallgrass Energy LP, although the pain there is compounded by an agreement between the buyer and Tallgrass’s executives that effectively shields the latter from losses (see this).EnLink captures so much of what has gone wrong in America’s pipelines business. There’s the misalignment of interest between ordinary investors and the sponsors steering the company’s destiny. There’s the exposure to commodity markets from which, in theory, midstream companies were supposed to be insulated. Above all, there’s the overcapitalization of this sector, with obligations piled onto assets (largely to fund outsize payouts to controlling sponsors) that ultimately couldn’t generate the profits to service them (largely because too much stuff got built).Almost exactly four years ago, Kinder Morgan Inc. presaged the midstream reckoning to come by slashing its dividend. The stock has been listless for much of the period since then; even with the cut, chipping away at debts in a post-boom environment is a laborious process. As this decade of nominal success for America’s shale boom draws to a close, EnLink’s predicament shows the hangover remains very much a work in progress.(1) This assumes the full $1 billion remains outstanding. Interest is charged at Libor plus 4.25%, equating to 6.15%, or about $62 million. A debt-service covenant ratio of 1.1 times takes this to $68 million. Mandatory annual amortization of 1% of the loan plus assumed G&A costs results in an estimated minimum requirement of about $80 million to service the debt. Details derived from Moody's Corp.'s initial rating report from July 2018.To contact the author of this story: Liam Denning at firstname.lastname@example.orgTo contact the editor responsible for this story: Mark Gongloff at email@example.comThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
Real estate mogul Sam Zell is buying up distressed oil assets on the cheap as U.S. drillers are letting go of acreage to pay off mountains of debt
(Bloomberg) -- Billionaires are circling the distressed U.S. oil and gas patch, looking to pick up assets on the cheap at a time when the state of the industry is scaring off other investors.Sam Zell has teamed up with Tom Barrack Jr. to buy oil assets in California, Colorado and Texas at fire-sale prices from companies trying to get ahead of a coming credit crunch. Dallas Cowboys owner Jerry Jones said his Comstock Resources Inc. is in talks to acquire natural gas assets in Louisiana from struggling Chesapeake Energy Corp.“I compared it recently to the real estate industry in the early 1990s, where you had empty buildings all over the place, and nobody had cash to play,” Zell said in an interview on Bloomberg TV Thursday. “That’s very much what we’re seeing today.“Thanks to the shale revolution, the U.S. has become the world’s biggest oil producer. The investors behind that growth, however, have little to show for it. After years of churning through cash with paltry shareholder returns, independent oil and gas drillers are down more than 40% since 2014. Lenders are becoming more discerning after easy money enabled much of the original boom.Oil and gas prices, meanwhile, remain depressed.That’s fueling a slowdown. The number of active drilling rigs in the U.S. has declined, and some of the biggest independent producers are lowering growth plans. Chesapeake Energy Corp., once the second-biggest U.S. producer of natural gas, warned investors last week that it may not be viable as a “going concern” if low oil and gas prices persist.Here’s SamEnter the billionaires.“What we’re seeing are situations where companies are taking steps in anticipation of problems rather than responding to problems,” said Zell, 78.He and Barrack teamed up in September to create Alpine Energy Capital LLC, a rebranded Colony HB2 Energy, which was formed in 2018 and recently closed a $320 million investment with California Resources Corp.“The seller in that was a big company -- not in trouble but not terribly liquid, and therefore looking for ways to, in effect, get somebody else to put up the money to keep the game going,” Zell said.A sale of Chesapeake’s Louisiana assets has been pegged as one of the few remaining options for a company that has become a poster child for the promise and peril of the shale industry.Jones, 77, who owns 73% of Comstock, said through his assistant that a deal could be valued at more than $1 billion. That would give Chesapeake a cash infusion at a time when all eyes are on the company’s ability to pay its debts.That cash-flush opportunists like Zell, who’s been called “the grave dancer” for his ability to buy at the bottom of markets, see value in assets belonging to an industry that’s in distressed-sale mode could signal that the bottom is here -- or, at least, close.Real EstateZell can call the top of markets, too. Many people said that’s what he did with the U.S. commercial real estate market in 2007, when he unloaded a portfolio of office buildings to Blackstone Group Inc. At the time, he denied that was the case.It remains to be seen, of course, if oil and gas prices have hit bottom. Forecasts for next year don’t paint a pretty picture, but some analysts are pointing to a slowdown in U.S. production growth as reason to believe prices will pick up at the end of 2020 and into 2021.Unlike Jones, Zell said he’s staying away from gas for now.“The oil situation is in much better shape,” Zell said. “And the amount of capital is disappearing.”\--With assistance from Alix Steel and Sophie Alexander.To contact the reporter on this story: Rachel Adams-Heard in Houston at firstname.lastname@example.orgTo contact the editors responsible for this story: Simon Casey at email@example.com, Bob IvryFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
Shale icon Chesapeake is reportedly in talks with Comstock Resources about selling its Haynesville shale assets which could be worth more than 1 billion dollars
Chesapeake Energy's (CHK) quarterly results are affected by lower natural gas production volumes, decline in realized commodity prices and higher average production expenses.
(Bloomberg) -- Chesapeake Energy Corp., the U.S. natural gas producer that’s struggling under the burden of a high debt-load and low prices, said its second-biggest investor distributed its stake to its limited partners.NGP Energy Capital Management LLC “made an in kind pro rata distribution of the shares” to partners of its funds, Oklahoma City-based Chesapeake said in a statement late Tuesday. The statement made no further clarification, and calls and messages to Chesapeake and NGP after normal business hours weren’t immediately returned.NGP held a 16% stake with a market value of $208.2 million. The private equity firm became a major shareholder after Chesapeake bought WildHorse Resource Development for $1.86 billion this year.Chesapeake’s shares have tumbled 68% so far this year. They plunged to less than $1 last week after the company warned it may not be a viable “going concern” if low oil and gas prices persist. The company, once worth more than $30 billion, is now valued at about $1.3 billion. Its stock fell again Tuesday, dropping 17%.Its current capital and operating program, along with a planned 30% reduction in capital expenditures in 2020, will strengthen the financial position of the company for the long term, Chesapeake said Tuesday.“We have substantial liquidity with no significant near-term maturities,” Chief Executive Officer Doug Lawler said in the statement.\--With assistance from Rachel Adams-Heard.To contact the reporter on this story: Carlos Caminada in Calgary at firstname.lastname@example.orgTo contact the editors responsible for this story: Simon Casey at email@example.com, Joe CarrollFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Carbo Ceramics Inc. plunged 47% after warning investors it may fail as a going concern in part because its largest frack-sand customer halted purchases.The slump on Monday was the fracking sand provider’s worst since its 1996 debut as a public company. The Houston-based company issued the warning in a statement after equity markets closed on Nov. 8.Carbo’s biggest sand client notified the company after the end of the third quarter that it would discontinue purchases, according to the statement. The company also is bracing for a weakening in the frack-sand market overall going into 2020. Shale gas driller Chesapeake Energy Corp. last week warned it may go under as a result of low energy prices.“There is an elevated risk associated with the company meeting its existing financial forecast and the company may ultimately conclude it is unable to continue as a going concern in a future period,” the company said in the statement.The oil-industry’s biggest hired hands have been warning that demand for crews and equipment used to frack oil and natural gas wells will continue to drop. Carbo has lost more than $3 billion in market value since the worst crude crash in a generation began five years ago.Carbo was down 45% to 85 cents at 10:35 a.m. in New York trading.To contact the reporter on this story: David Wethe in Houston at firstname.lastname@example.orgTo contact the editors responsible for this story: Simon Casey at email@example.com, Joe Carroll, Christine BuurmaFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg Opinion) -- EOG Resources Inc. delivered something of an antidote to the venom that coursed through the fracker stocks Wednesday. Another darling of the sector, Diamondback Energy Inc., had sickened investors with a shock miss on production, adding to the growing chorus of voices announcing shale’s imminent demise (while oil prices also fell on trade fears). EOG’s combination of soundly beating production guidance with lower-than-expected spending, released Wednesday evening, was like a calming tumbler of whiskey at the end of a grueling day.Or grueling earnings season; EOG’s call marks the end of quarterly numbers for the biggest exploration and production numbers, and investors will mostly be glad to see the back of them. Chesapeake Energy Corp.’s slump below a buck a share was an extreme example — albeit with a certain fin-de-siècle frisson — but the problems of high leverage and too much spending remain endemic across the sector.EOG stands out for bucking that trend. And though it seems churlish to say, it could quite easily stand out even more.EOG has cracked the formula for pleasing a cohort of energy investors who are increasingly ornery (if they even bother to show up, that is): steady growth twinned with free cash flow and low leverage. Higher productivity, generated by in-house improvements rather than just squeezing suppliers, according to the company, means EOG has dropped its average rig-count target from the year from 40 to 36. Net debt to Ebitda has dropped from an already conservative 0.7 times a year ago to just 0.5 times at the end of the third quarter. Little wonder EOG’s benchmark 2023 bonds have rallied by more than 5% this year. That stands in marked contrast to the stock, which, even after Thursday morning’s 5% bump, is down 13%. Weak oil prices and broader revulsion to any company producing the stuff explains some of that, of course. But EOG has lagged a falling sector as its earnings multiple has dropped a couple of points.With others suffering — Diamondback’s multiple has slumped to less than 9 times — investors may be worried about EOG making a big acquisition, which hasn’t exactly been the path to prosperity in the sector. EOG went out of its way on Thursday morning to dispel such notions. Another risk that has surfaced of late, that a Democratic president might restrict fracking on federal lands, also prompted EOG to add a couple of slides to its presentation. Given the number of moving parts, not least exactly how much a president antipathetic to fracking could actually do, this seems a minimal risk for now.One way to address it all at a stroke would be to bump up EOG’s dividend substantially. The company has been raising payouts at a fair clip already, up more than 70% over the past two years. But the actual amounts are pretty small, with EOG paying out just $166 million in the third quarter, equivalent to just 8% of cash from operations and about 29% of free cash flow after capital expenditure. On a trailing four-quarter basis, the proportions are even lower.EOG’s stock now yields about 1.5%, and the company targets 2%, which would take it slightly above the S&P 500. That’s a significant level to beat given the E&P sector’s history of benchmarking by navel gazing, judging its own performance against the weaknesses of peers.Getting there wouldn’t actually cost that much: an extra $200 million or so, annualized. That would take payouts to 10% of cash flow from operations and 42% of free cash flow. EOG of course doesn’t want to set itself up for a potential cut down the road if oil prices drop, perhaps as early as next year. But low leverage and the wide cushion of free cash flow above and beyond dividend payments provide a significant buffer already.Moreover, EOG spent much of Thursday morning, as it does every quarter, playing up the low breakeven prices of its drilling inventory, providing resilience to the inevitable swings in commodity prices. A relatively small increase to the dividend bill would go a long way in backing that up, and closing the valuation gap.To contact the author of this story: Liam Denning at firstname.lastname@example.orgTo contact the editor responsible for this story: Mark Gongloff at email@example.comThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
Investors need to pay close attention to Chesapeake Energy (CHK) stock based on the movements in the options market lately.
Several high-profile shale executives have claimed that the glory days of U.S. shale are well and truly over, with some of the sector’s biggest companies pulling back significantly
(Bloomberg) -- Chesapeake Energy Corp. collapsed to a 20-year low Wednesday, one day after the shale gas driller warned it may not be able to outlast low fuel prices and issued a “going concern” notice.Shares fell as much as 24% intraday to their lowest since 1999. The stock also briefly dipped below the $1/share mark, and Wall Street isn’t optimistic on Chesapeake’s future.“While we don’t expect this move to come as a surprise given balance sheet issues, the going concern warning in the most recent 10-Q highlighted a declining leverage covenant that may be [to] difficult overcome in our view,” Tudor Pickering Holt & Co. said. The Houston-based energy investment bank on Wednesday downgraded its stock recommendation to a sell from hold.Chesapeake’s Haynesville shale asset is the most likely candidate for a sale, though “production (and value) is declining by the day as the asset has entered base decline,” Tudor analyst Sameer Panjwani wrote in a note to clients.Meanwhile, Chesapeake’s $1.3 billion of 8% senior unsecured bonds maturing in 2025 dropped 3.5 cents to 60.5 cents on the dollar, Trace prices show. The bonds are trading at a record low.Sanford C Bernstein is also bearish on Chesapeake’s survival prospects. Chesapeake could look to tap its revolver, or engage in more debt-for-equity transactions, but “neither of these options give us comfort about the prospect of the stock over the next 12 months,” analyst Bob Brackett said in a note. Bernstein cuts its price target to 50 cents from $1.25 per share, reiterating an underperform recommendation.\--With assistance from Shannon D. Harrington.To contact the reporter on this story: Michael Bellusci in Toronto at firstname.lastname@example.orgTo contact the editors responsible for this story: Brad Olesen at email@example.com, Scott SchnipperFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Crude climbed to the highest level in six weeks as investors remained optimistic that the U.S. and China are moving closer to signing a trade deal.Futures rose 1.2% in New York on Tuesday. Prices held up after the American Petroleum Institute reported that U.S. stockpiles rose 4.26 million barrels last week, according to people familiar. China is reviewing locations in the U.S. where President Xi Jinping would be willing to meet his counterpart Donald Trump to sign the first phase of a trade deal, according to people familiar with the plans.“The U.S. seems more willing to roll back existing tariffs and the fact that they’re talking about that and looking to get something done for this phase-1 deal is going to move oil,” said Josh Graves, senior market strategist at RJ O’Brien & Associates in Chicago. “If everything stays the course and nothing changes in regards to the trade deal, you’re going to continue to see buying interest in the market.”Crude is still down about 14% from a peak at the end of April as the spat between Beijing and Washington has threatened the demand-growth outlook. In addition, OPEC cut its estimates for the amount of oil it will need to pump in the coming years, projecting that its share of world markets will shrink until the middle of the next decade amid a flood of U.S. shale supplies.China is seeking to roll back U.S. tariffs on as much as $360 billion of Chinese imports before President Xi agrees to signing a partial trade deal, according to people with familiar with the matter. Negotiators asked the Trump administration to eliminate tariffs on about $110 billion in goods that were imposed in September and lower the 25% tariff rate on about $250 billion that began last year, said some of the people.West Texas Intermediate for December delivery traded at $57.17 at 4:46pm after adding 69 cents to settle at $57.23 a barrel on the New York Mercantile Exchange.Brent for January settlement rose 83 cents to end the session at $62.96 on the London-based ICE Futures Europe Exchange. The global benchmark crude traded at a $5.67 premium to WTI for the same month.The industry-funded API also reported that stockpiles in Cushing, Oklahoma, rose 1.25 million barrels while gasoline and distillate inventories contracted by a combined 5.82 million barrels. The Cushing build would be fifth consecutive increase, if the EIA data confirms it.Meanwhile, in the U.S., crude stockpiles probably rose by 2 million barrels last week, according to the median estimate of analysts surveyed by Bloomberg.“As you continue to see forecasts for builds and confirmation from the results, that is something the traders are looking at but not putting a lot of weight behind it compared to the overall big picture,” Graves said.To contact the reporter on this story: Jacquelyn Melinek in New York at firstname.lastname@example.orgTo contact the editors responsible for this story: David Marino at email@example.com, Mike JeffersFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg Opinion) -- Occidental Petroleum Corp.’s swing from aggressive offense to deep defense has taken about six months. In May, it elbowed aside much bigger Chevron Corp. to capture Anadarko Petroleum Corp. On Tuesday, it laid out plans to cope with the aftermath.The messiness of Oxy’s third-quarter results, the first to include Anadarko, was their saving grace. Earnings missed consensus estimates by a mile, but the panoply of moving parts, including merger expenses, makes the number almost meaningless. Far more important is Oxy’s plan for 2020, which can be summed up in one word: austerity.The company took the unusual step of providing details about spending plans for next year, something it normally saves for the fourth-quarter call. There is a simple reason for this: The stock yielded north of 7% for much of the period since the Anadarko deal closed in early August. There is a fine line between a yield that looks unusually attractive and one that just looks unsustainable, and Oxy has been walking it.So while the mantra of favoring free cash flow over growth can be heard pretty much everywhere in the oil business these days, Oxy is shouting it a little louder. Analysts were forecasting capital expenditure of $7.5 billion in 2020, according to figures compiled by Bloomberg. Oxy’s target is at least $2 billion lower than that, a figure that happens to cover three quarters of the annualized dividend payment.Lower capex comes with a catch: guidance for production growth in 2020 is now set at 2% compared with the 5% target mentioned during the Anadarko pursuit. That said, the budget still implies a productivity gain of roughly 16% compared with the consensus forecast, assuming the latter includes capex for Western Midstream Partners LP; Oxy’s budget does not. Such synergies are, of course, the basis of Oxy’s argument for buying Anadarko in the first place, and much of Tuesday’s call was taken up with emphasizing early realizations of those and further benefits to come. As has been the case with many other E&P acquirers in the past year or so, however, Oxy isn’t getting the benefit of the doubt. As of lunchtime Tuesday in New York, the stock was down almost 6%, making it the worst performer of any size in the sector apart from Chesapeake Energy Corp. — which trumped everyone with a going-concern warning.The fact remains that Oxy stretched itself enormously to win Anadarko just as the outlook for oil soured. In doing so, it also took on high-priced financing from Warren Buffett that looks set to swallow 40% of the current value of the deal’s cost savings (see the math here). Payments on Buffett’s preferred stock took almost half of Oxy’s adjusted net income in the third quarter. Having begun the year trumpeting reasonable growth balanced with high payouts, Oxy now offers low growth to protect payouts.In short, having hurt its credibility with investors, Oxy still has a lot to prove in winning it back. And as next year’s guidance shows, that finely balanced dividend yield will have to do much of the work in the meantime.To contact the author of this story: Liam Denning at firstname.lastname@example.orgTo contact the editor responsible for this story: Daniel Niemi at email@example.comThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
It seems that bullish sentiment is finally returning to oil markets with trade war discussions making progress and OPEC suggesting that it will cut deeper in December
(Bloomberg) -- Chesapeake Energy Corp. -- once the epitome of America’s shale-gas fortunes -- is warning it may not be able to outlast low fuel prices.Reflecting growing pain across the energy sector, the Oklahoma-based company’s shares and bonds tumbled Tuesday after it said it may not be viable as a “going concern” if low oil and natural gas prices persist. The warning came just over an hour after the company posted a wider-than-expected loss for the third quarter.A decade ago, Chesapeake was a $37.5 billion company led by the energetic Aubrey McClendon, an outspoken advocate for the gas industry. Chesapeake became the second-largest U.S producer of the fuel. But in 2016, McClendon was indicted by a federal grand jury on charges of conspiring to rig bids for the purchase of oil and gas leases. A day later, he was dead after his car collided with a highway overpass.On Tuesday, Chesapeake’s market value was $2.6 billion. The company was brought there by years of low gas prices, the result of an industry that has been the victim of its own success in cracking open shale-rock formations for access to additional supplies.Chesapeake has spent the years since McClendon’s death selling assets, cutting jobs and trying to produce more oil in an effort to chip away at a mountain of debt. Its notice Tuesday comes as shale producers struggle to prove to investors they can produce positive cash flow, not just grow at any cost.When times were good, Chesapeake’s campus was home to an army of construction cranes as McClendon, a graduate of Duke University, sought the look of a leafy private university for the company’s headquarters. It had the accouterments of a country club, with an multistory health center featuring two massage therapists on staff, a large daycare facility, a soccer field and running track.McClendon at one point had amassed about $400 million of real estate in the Oklahoma City area, including at least two shopping centers, a church and a grocery store. He invested in local restaurants and plastered the Chesapeake name on the arena housing the Oklahoma City Thunder basketball team, which he partly owned. All of that drew fire from investors, who said the company should focus more on oil and gas while selling non-core assets.The going-concern warning signals that Chief Executive Officer Doug Lawler’s six-year campaign to rescue Chesapeake from the billions of dollars in debts amassed by McClendon may be on the verge of failure. Lawler, who was hand-picked for the job by activist investor Carl Icahn, long sought to convert the gas giant into an oil company, to no avail.If oil and gas prices remain low, the company may not be able to comply with its leverage ratio covenant during the next year, “which raises substantial doubt about our ability to continue as a going concern,” Chesapeake said Tuesday in a quarterly filing. The warning comes less than a year after Lawler orchestrated the $1.9 billion takeover of shale explorer WildHorse Resource Development Corp.Shares fell as much as much as 17%, the most in more than three years. Chesapeake’s 8% coupon notes due 2025 are among the most actively traded securities in the high yield market, according to Trace. The bond’s price dropped by over $4, the largest price drop on record for the security. Chesapeake’s 8% coupon notes due 2027 also plunged to their lowest price ever.The shale boom has sent gas prices tumbling to less than $3 per million British thermal units from an all-time high near $16 in 2005. Terminals originally designed to import the fuel have been converted to export plants as the supply surge overwhelms domestic demand, leaving producers to seek international markets for their output.Chesapeake executives tried to assuage some fears on a third-quarter conference call. The producer continues to look at opportunities to improve its balance sheet, including asset sales, deleveraging acquisitions and capital funding options, they said.“We could go out and seek a waiver at any time from our bank group, but at the moment we continue to be focused on the strategic levers that result in permanent debt reduction,” Chief Financial Officer Nick Dell’Osso Jr. said.‘Massive Debt’Chesapeake’s borrowings totaled $9.73 billion as of Sept. 30, up from $8.17 billion at the end of last year.“With massive debt, leverage is not going down every quarter you continue to outspend,” Neal Dingmann, an analyst at SunTrust Robinson Humphrey Inc., said by phone. “What is leverage going to look like next year and how are you going to address it internally or externally? That’s the story.”Though Chesapeake plans to reduce spending by almost a third next year as it seeks to generate free cash flow, its third-quarter capital expenditures rose 16% from a year earlier as it completed more wells. The producer is standing by its budget guidance for full-year 2019.Chesapeake has already taken some steps to cut debt. In September, the company announced a $588 million debt-for-equity swap. In an earnings statement earlier Tuesday, Chesapeake said it had restructured gas gathering and crude transportation contracts in South Texas and the Brazos Valley to improve future returns.“They need to walk people through how they plan to get free cash flow,” Sameer Panjwani, an analyst at Tudor, Pickering, Holt & Co., said by phone. “A big part of it could be asset sales. They’ve talked about it before on a high level, but how far along are they in some of these processes?”(Adds background on Chesapeake spending starting in sixth paragraph)\--With assistance from Christine Buurma, Jeremy Hill, Allison McNeely and Joe Carroll.To contact the reporters on this story: Rachel Adams-Heard in Houston at firstname.lastname@example.org;David Wethe in Houston at email@example.com;Kriti Gupta in New York at firstname.lastname@example.orgTo contact the editors responsible for this story: Simon Casey at email@example.com, Christine Buurma, Joe CarrollFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
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