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Markets Like What Chesapeake Is Doing with Its Debt

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Chesapeake’s debt situation

Another key reason behind why investors have kept Chesapeake Energy (CHK) in their sights is its significant steps towards debt reduction and management. At the end of 3Q16, CHK had $8.7 billion in total debt, which is down from $9.7 billion at the end of 2015. The below image shows the extent to which CHK has reduced its 2017 maturing and puttable debt obligations since 3Q15.

The $500 million which was due in 2016 has been paid off. Maturities in 2018 and 2019 have shrunk to $599 million from $1 billion and to $504 million from $1.5 billion, respectively. The above were achieved through a combination of debt exchanges, open market repurchases, and equity-for-debt exchanges.

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In October 2016, CHK completed private exchanges of 110.3 million shares of its common stock for its various preferred stocks, totaling $1.2 billion. This will help bring down its annual dividend obligations by $67 million. CHK also repurchased outstanding debt of ~$105 million (maturing or puttable in 2017 and 2018) from the open market.

Additionally, in October 2016, CHK issued $1.3 billion in unsecured 5.5% convertible senior notes due in 2026. CHK expects to use the proceeds for general corporate purposes like debt repurchases.

In 3Q16, CHK also entered into a secured five-year term loan facility of $1.5 billion. The net proceeds were used to purchase and retire $898 million in principal amount of its outstanding senior notes and $708 million in principal amount of its outstanding contingent convertible senior notes.

So, CHK seems to be following the strategy of reducing its near-term debt, delaying its debt forward a couple of years until the commodity price (USO) (UNG) environment improves.

While CHK’s debt is far from being “risky business” its debt management efforts certainly seemed to have gotten it a big nod from the markets as bankruptcy fears seem long forgotten. Asset sales and the recent Barnett shale exit were also some key steps towards CHK’s debt reduction strategy.

Another company that has been taking steps to reduce its debt is Whiting Petroleum (WLL). Anadarko Petroleum (APC) is yet another company that’s battling a high debt load. All these companies form ~6% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

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