Chesapeake Energy's management is 'losing all credibility,' warns analyst

Posted Jan 29th 2009 3:30PM by Elizabeth Harrow
Filed under: Analyst Reports, Chesapeake Energy (CHK), Options, Commodities

Analyst Phil Weiss of Argus Research is none too impressed with the recent debt offering by Chesapeake Energy Corporation (NYSE: CHK). The natural gas concern on Wednesday sold $1 billion in six-year notes, with proceeds going toward outstanding indebtedness under CHK's credit facility. The offer was hiked from its initial planned value of $500 million.

Additionally, Chesapeake said it "anticipates reborrowing [under its revolving bank credit facility] from time to time to fund drilling and leasehold acquisition initiatives and for general corporate purposes." It seems the commodity firm is growing steadily more cavalier with its balance sheet -- CHK ended the fiscal year with just $1.75 billion in cash, compared to its December forecast of $2.5 billion.

"It just shows me that management is losing its credibility," asserted Weiss, pointing to CHK's earlier promise to operate within the confines of its cash flow. "They keep telling us they are slowing down, but they are still acting like a growth company. I don't get it anymore."

Investors seem equally puzzled, as CHK is trading in the red today. The stock has plunged 77.4% from its July 2008 peak at $74, and it's currently attempting to surmount staunch resistance from its 10-week moving average.

However, option players have recently bulked up on bullish options, thanks in part to speculation that BP Plc (NYSE: BP) may launch a buyout bid for CHK. During the past 10 days, traders on the International Securities Exchange (ISE) have bought to open 1.63 calls for every put on the stock. If an acquisition offer fails to materialize, these bulls could rush for the exits -- thereby extending the equity's lengthy decline.

Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.

Tags: chesapeake energy, ChesapeakeEnergy, chk, credit facility, CreditFacility, debt offering, DebtOffering, management, Phil Weiss, PhilWeiss