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Chesapeake's (CHK) Capital Structure Improves, Here's Why


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Chesapeake Energy Corporation (CHK - Analyst Report) announced that its capital structure has improved to quite an extent owing to recent transactions.

Chesapeake closed a private placement of $1.25 billion of unsecured convertible senior notes on Oct 5. The notes have an interim call feature that will allow the company to convert the debt to equity in three years if its stock trades above 130% of the conversion price for a specified period.

Chesapeake had about $1.0 billion in pro forma for the convertible debt issuance and cash on hand as of Sep 30, 2016. The company had no borrowings on its revolving bank credit facility.

In addition, Chesapeake closed the privately negotiated purchase and exchange agreements. Under these agreements, the company exchanged about 110.3 million shares of its common stock for 134,000 shares of 5.00% Cumulative Convertible Preferred Stock (Series 2005B), 606,271 shares of 5.75% Cumulative Convertible Preferred Stock and 553,007 shares of 5.75% Cumulative Convertible Preferred Stock (Series A).

This amount of preferred stock signifies about $1.2 billion of liquidation value, which was exchanged at a discount of more than 40%. Post transaction, the company is now left with outstanding common shares of about 886 million, excluding future dilution from convertible securities.

These transactions emphasize the company’s efforts to gain excess liquidity and address the remaining maturities of its debt through 2018. These agreements represent an important step by Chesapeake toward reaching its financial goals of achieving $2–3 billion of debt reduction and growing production within free cash flow. The company continues to simplify its balance sheet and lower the overall cost of financing.

Chesapeake is an independent oil and gas company engaged in the acquisition, development, and production of onshore U.S. natural gas resources. The company has grown rapidly and is now the second-largest natural gas producer in the U.S. It is also the 13th largest producer of oil and natural gas liquids in the U.S. Chesapeake is noted for growth by acquisition. The company has also demonstrated considerable drilling prowess, capitalizing on its extensive inventory of acquired undeveloped acreage to make substantial reserve additions.

Currently, Chesapeake carries a Zacks Rank #3 (Hold). Some better-ranked players from the energy sector include Enviva Partners, LP (EVA - Snapshot Report) , NGL Energy Partners (NGL - Snapshot Report) and Evolution Petroleum Corp. (EPM - Snapshot Report) . All of these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Enviva Partners posted a positive earnings surprise of 20.51% in the preceding quarter.

NGL Energy Partners has a mixed earnings surprise history. The partnership posted positive earnings surprise in two of the last four quarters. It reported a positive earnings surprise of 1480.0% in the preceding quarter.

In the last reported quarter, Evolution Petroleum Corp. delivered a positive earnings surprise of 350.00%. Coming to the earnings surprise history, the company beat estimates in two of the last four quarters.

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