Chesapeake Energy – Fishy

The saga with Chesapeake Energy (NYSE: CHK) continues – today they released their 10-Q filing where the new pronouncement was that their asset divestiture program was taking a bit longer than expected. The market subsequently took them down 14%, which took them down into lows not seen since the 2008 financial crisis (and the CEO’s infamous margin call which I wrote about earlier).

The company subsequently announced later that day they inked an agreement with Goldman Sachs for a $3 billion credit facility that is on par with the senior bondholders – at an initial rate of LIBOR plus 7%, which is currently 8.5%; this rate will go on for the calendar year and presumably will dramatically increase thereafter.

When glossing over the 10-Q, the imminent need for liquidity appears to be the voracious cash-guzzling appetite of its capital expenditures – $3.7 billion in the quarter alone, offset by about $274 million in cash flows through operations. Ouch.

Also, looking at the balance sheet makes me wonder why they have more in payables than receivables, usually not a good sign.

Goldman Sachs is giving them liquidity at a high cost and presumably they’ve been smart enough to look at their books and loan them money at an appropriate level of capitalization. This does not, however, bode well for the equity holders. My intuitive would suggest there is a lot more garbage going on within the company that shareholders aren’t going to be exactly receptive to. This might look like a deep value play given the purported value of its assets, but if you’re taking money short term money from Goldman Sachs at 8.5%, the other side of the negotiating table is going to see this and realize you might be more desperate than it seems to get rid of your assets.

The company also gives out a 9 cent quarterly dividend, which amounts to $240 million a year, which will now be financed by this Goldman Sachs bridge loan.

No positions in CHK, although I’ve done a little digging and don’t really like what I see.