Natural gas producer Chesapeake Energy Corp, in a series of filings with the Securities and Exchange Commission late Wednesday, said it may issue close to $2 billion in common shares in coming months to raise operating cash and to fund drilling leases the company is trying to renegotiate
Natural gas producer Chesapeake Energy Corp, in a series of filings with the Securities and Exchange Commission late Wednesday, said it may issue close to $2 billion in common shares in coming months to raise operating cash and to fund drilling leases the company is trying to renegotiate.
The move could substantially dilute shareholders' investment at a time when the company's stock already has plummeted 70% since July. The potential offerings mark Chesapeake's latest attempt to shore up its tattered finances as it's squeezed by heavy debt, falling gas prices and tight credit that have combined to drain its available cash.
In one filing, Chesapeake registered to sell up to $1 billion worth of shares, and said it would use the net proceeds for "general corporate purposes, including funding our exploration, development and other capital expenditures."
In a separate filing, Chesapeake said it also may issue up to 50 million shares that it could use to help fund ongoing purchases of assets in lieu of using some of its cash. Chesapeake cited the financial crisis, falling gas prices and worries about oversupplies as the impetus for renegotiating some of its current drilling lease purchase agreements with an aim toward reducing the purchase price.
"Some leaseholders may agree to accept Chesapeake common stock for some or all of the consideration," the company said in its filing registering 50 million shares of common stock, "some or all of which we may use for this purpose."
Jeff Mobley, the company's senior vice president of investor relations, said the company doesn't plan to use the $1 billion registration immediately, adding that the company wants to have "flexibility" in uncertain times. "We want to have the ability to use them in the future," he said.
He declined to comment on the 50-million-share registration because it's still subject to SEC approval.
Before the Thanksgiving-eve filings, the company's shares closed at $20.24 in 4 p.m. trading on the New York Stock Exchange, up 10.96% from Tuesday but down 70.84% from a peak of $69.40 on July 2.
The offerings apparently override assurances the company has made in recent months that it would live within its cash flow and not issue more stock or borrow more money. The stock issues are not likely to be well received by shareholders, analysts said. "This is the equity offering of last resort … not good, and certainly dilutive," said Dan Pickering, an analyst at investment bank Tudor, Pickering, Holt & Co.
However, it will serve the purpose of alleviating Chesapeake's cash crunch, he added, "so that is the very small silver lining."
The company's troubles stem in part from an abundance of natural gas supplies that have accumulated in the U.S. over past months, which has deflated prices. Natural gas futures have dropped 8% so far this year. The banking crisis further complicated the situation, drying up the credit on which Chesapeake had heavily relied to fund its capital-intensive operations. The combination of those factors set the company on a quest for cash.
In the past four months, Chesapeake signed three multibillion-dollar deals to sell leases for some fields and a share of its interests in others. The company sold assets to British oil giant BP PLC for $3.6 billion in two separate transactions. And it sold part of its interest in a giant oil field to Norwegian oil company StatoilHydro ASA for $3.4 billion. The company also exhausted its billion-plus-dollar revolving line of credit, and cut back sharply on its spending. Mr. Mobley said the company is now running 130 rigs, down from a peak of 158 in August.
Executives have been looking for additional transactions, including selling their assets in South Texas.
Fears of a cash shortage helped drive Chesapeake shares down. In response, the company has tried to reassure investors, pledging not to issue more shares and instead cut spending and sell assets to generate cash.
In the prospectus for its latest proposed offering, Chesapeake said it believes it has enough cash to fund its operations, but added that "further deterioration of the economy and other factors could require us to further curtail our spending and/or seek alternative sources of capital."