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.

It has a few claims to fame. The most positive and negative aspects of the company seem to be directly related to its CEO, Aubrey McClendon. Concentrating on the negative side of the story, is that McClendon formerly owned about 5% of the company, got liquidated out on a huge margin call in the 2008 economic crisis. He was forced to liquidate his stake in the company at very adverse market prices. This would be a pretty good signal to anybody that the main person at the top is one tremendous risk-taker, but that risk is a double edged sword.

The corporation’s board of directors are directly in McClendon’s pocket as they subsequently awarded him a $75 million bonus in deferred compensation relating to well drillings and other such matters, but this presumably related to rubbing a salve on the huge financial wound that was incurred back in 2008.

His financial troubles have recently re-emerged when it was revealed that he had partial ownership stakes in natural gas wells that were also jointly owned by the corporation and this created a conflict of interest with respect to liquidation. Basically the conflict is that McClendon was in a position to front-run his own company or otherwise receive preferential treatment. Compounding the matter was the rumour that he apparently has a billion dollars that he loaned to take such an interest in these wells.

It is not helping the company that natural gas prices have reached record lows, which will be depressing the company’s profit margins.

So why the heck would anybody want to invest in this basket case? The only rationale is that investors would have to believe that the board of directors would be overturned and they would be able to no longer be in the back pocket of management.

Perhaps the way out for the company is an outright buyout, but this is assuming there are no other lingering financial matters within a corporation that has management that does not exactly seem to be aligned with shareholders’ interests.

I haven’t had time to do a more rigorous financial analysis on the firm, but it appears to be another oil-and-gas type company that is blowing more money out on the capital expenditure side than receiving in operating cash flow, and with the decrease of natural gas prices, those capital expenditures will have to slow down quite quickly.

Despite all of these internal struggles, the bond market appears to be somewhat calm with the credit-worthiness of the company – an example would be their bonds maturing in 2020, trading from a yield to maturity of about 6% to about 7.25% in recent times over the past three months. Preferred shares are also trading at around the 6% level, which is odd to say the least.

The only thing you can do when you see such a waste of corporate resources is selling your shares if you own them, and not buying them if you don’t.

I should take this opportunity to point out it was exactly the same company and its CEO that in November 2008 faced a margin call on his own stock, forcing him to liquidate 5.4% of the company in a very rapid transaction.

I said the following back in November 2008:

Some might think this would represent the best buying opportunity – cashing in on the misfortune of somebody’s financial errors. Unfortunately in the case of Chesapeake, the last company I would want to invest in would have a CEO that got caught by a massive forced liquidation like this one – first of all, his incentive to perform well has just disappeared (having no more equity stake in the company) and secondly, one would wonder whether he’d make a similar miscalculation with the company’s finances.

It appears that the CEO is just as reckless with the company’s finances as he is with his own – any prudent investor should blackball the entire Board of Directors of Chesapeake Energy – if any of them serve on a corporate board (or heaven forbid, management) of a company you are invested in, it would be a yellow flag.

This is why the iceberg theory of bad news is applicable – if there is a small piece of bad news, chances are there is a lot more to go with it. In the case of Chesapeake, this is the last energy company I would want my dollars invested in.