Shares in Chesapeake Energy Corp. (CHK) plunged 41% in after-hours trading on Monday after Bloomberg reported that the debt-laden shale pioneer is preparing a potential bankruptcy filing.
According to people with knowledge of the matter, CHK is now gearing up to hand control to its senior lenders. Chesapeake is negotiating a restructuring support agreement that could see holders of its FILO term loan take a majority of the equity in bankruptcy, said the Bloomberg sources, adding that the terms could change.
Before the news broke, Chesapeake had spiked 181% in a dramatic trading session on Monday- with 22 trading halts implemented for volatility. CHK is now trading up over 400% on a five-day basis thanks to a strong jobs report and an extended production cut from OPEC producers.
With a debt burden of around $9 billion, Chesapeake could potentially default on its June 15 interest payments, invoking a grace period while creditor discussions are ongoing, Bloomberg reported. However no final decision has been made.
At the same time, the company is also seeking lenders for debtor-in-possession financing to finance its operations during bankruptcy proceedings, the sources said.
Despite the recent rally, CHK is still trading down 58% year-to-date. And unsurprisingly analysts have a very bearish Strong Sell consensus on the stock’s outlook with 8 recent sell ratings and just 1 hold. Meanwhile the average analyst price target of $16.50 indicates another 76% downside potential lies ahead. (See Chesapeake stock analysis on TipRanks).
“We do not expect [Chesapeake] to be in compliance with its financial covenants beginning in Q4 2020, which would result in an act of default on the credit facility,” CFRA analyst Paige Meyer told investors recently, while cutting her price target from $0.3 to zero. “With a default on the credit facility, we believe other lenders are likely to call debt due as well using ‘cross default’ clauses.”
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