In the second massive short-squeeze of the year for Chesapeake 'speculators', the company of the verge of bankruptcy has exploded 35% higher today, perfectly tagging (to the penny) the 200-day-moving-average. Breaking above the McClendon probe/suicide "squeeze" rally highs, at $6.13, CHK is at 5-month highs… as 'modeled' CDS spreads collapse after the management was forced to pledge the entire company to maintain existing credit lines.
As we concluded yesterday, while the stock may be delighted at this latest "can kicking", the unpleasant reality remains, namely that unless something dramatically changes in the company's income statement, Chesapeake has merely bought itself a few quarters of time while in the process stripping unsecured bondholders of any potential recoveries if and when it files for bankruptcy.
Chief Executive Officer Doug Lawler has employed a combination of debt exchanges, asset sales and open-market purchases of Chesapeake’s cut-rate bonds to reduce leverage and cope with falling gas prices. Chesapeake’s main focus is 2017 and 2018 “maturity management,” Lawler said in a presentation to analysts last month. In other words, without a dramatic rebound in commodity prices, CHK has about a year before it hits a refi wall at which point it will have to replace its current cheap debt with far more expensive funding, which will likely hand over major equity stakes to the existing bondholders, unless of course the company does not file Chapter 11 (or 7) long before.
And here is the punchline: the company lost about $40 million a day in 2015 and is expected to end this year in the red as well, based on the average estimate of 14 analysts in a Bloomberg survey.
The daily cash burn will only increase as Chesapeake is layered with even more debt and has to fund even more interest expense, which for the time being is manageable due to the existing low blended cost of its debt, but which will spike over the coming two years.
The banks however, don't care: they now are assured full control of all the company's assets when the hammer hits. As for the bondholders, there is always prayer and hope that soon the same "production freeze" headlines that push oil higher on a daily basis will finally shift over to natural gas.
Someone else who won't care if the company he built from scratch is handed over to the lenders: Aubrey McClendon who may have had a sense all of this was coming long ago.
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