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Chesapeake Energy: A Reason to Worry?

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Oct. 24 2017, Published 3:59 p.m. ET

Chesapeake Energy stock

Chesapeake Energy (CHK) maintained its downward momentum last week, despite rising energy prices (USO) (DBO) (UNG) (UGAZ). In the week ending October 20, 2017, Chesapeake Energy stock fell 2.1%—the third consecutive weekly decline.

Year-to-date, Chesapeake Energy stock has fallen ~45%. As you can see in the above graph, the company has performed poorly compared to the broader energy industry sector (XLE). XLE has fallen ~11% since the beginning of the year.

Chesapeake Energy stock and XLE have both underperformed the broader market (SPY) (SPX-INDEX) by a wide margin. SPY has risen ~14.2% since the beginning of the year.

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Chesapeake Energy’s downtrend was likely triggered by Jefferies’ ratings cut for Chesapeake Energy stock. Chesapeake Energy was downgraded to “underperform” from a “hold.” Its target price was lowered to $2. It was almost 52% lower than Chesapeake Energy’s stock price on October 9, 2017—the day before the announcement.

Is debt an ongoing concern?

Chesapeake Energy’s massive debt load could be the key reason for the downgrade. At the end of 2Q17, Chesapeake Energy had a principal debt balance of $9.7 billion—compared to a market capitalization of ~$3.5 billion.

While the company made significant strides in reducing its debt in the past few years, it has been adding to its debt again, which has likely concerned some investors. Read How Far Has Chesapeake Energy Come in Debt Reduction Efforts? to learn more.

On September 27, 2017, the company announced that it would be issuing 8.0% senior notes due in 2025 and 2027 in a private placement to raise $850 million. The proceeds will be used to purchase $550 million in aggregate price notes due between 2020 and 2022. Although the maneuver lengthens the time until the debt’s due date, it also adds $300 million of debt to Chesapeake Energy’s books.

In the light of this news, investors will watch to see how the company’s 3Q17 earnings impact its stock. Keep watching Market Realist for earnings coverage on upstream companies.

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