Obbligazioni societarie HIGH YIELD e oltre, verso frontiere inesplorate - Vol. 1
- Creatore Discussione TRADING_IDEAS
- Data di Inizio
- Stato
arkymede74
Forumer storico
sembra rassicurante come notizia..o no??
EUR Chesapeake Energy Top Pick: A challenging but attractive bond
CHESAPEAKE ENERGY CORP[FONT="] [/FONT]
CHK 6.25% 15/01/2017; ISIN : XS0273933902
Ask price: EUR 100.29, YTM 6.12%, 637 bp over Bunds
Official credit rating: BB+/Ba1 (S&P / Moody’s)
ŸIt was back in mid-October 2014 when we had a first high level look at US High Yield Energy as a subsector of the USD High Yield universe. Although not actively involved due to a lack of understanding for and access to that large but predominantly US centric segment, we still decided to produce a short comment on recent market developments. High Yield Energy had just undergone a big underperformance in response to the first wave of a massive sell-off in energy prices, which had started in the middle of the summer when oil prices (Brent quality) fell more than 20% from levels of around USD 110-115 to the mid-80s in mid-October or the lowest levels since late 2010 (Chart 1). The underperformance was indeed an eye catcher as underperformance of Energy bonds had been a highly unusual event since 2001: During that 14-year period Energy had outperformed the broader High Yield market by more than 100% on a cumulative basis.
ŸWe also said back then that “…The US High Yield Energy sector includes many mid-sized names that we in Europe luckily don’t know and don’t cover as they are by and large regional or national stories at best. Some of us may have heard of the more prominent names in the sector, such as Chesapeake Energy, UK-based Afren or El Paso Corp (which was taken over by Kinder Morgan in 2012). Chesapeake (Ba1/BB+/BB) in particular is an interesting name. It is the second largest issuer of USD Energy bonds, and it is covered and “Hold” rated by JB fixed income research. After a steep decline of its stock price (-32% year-to-date) the company’s market cap has fallen to US$ 11.6bn. Over the 12 months through June the company generated some US$ 20bn of revenues and 5bn in EBITDA.”
ŸWe went on to say that “…Chesapeake is one of the largest independent exploration and production (E&P) companies in North America. The company operates solely onshore in the US with exposure to multiple basins from the Rocky Mountains east to the Appalachian Basin. Key positives for the company are its very large proved reserve and production scale, sizeable high quality acreage positions in multiple basins across the US, and competitive drill bit finding and development (F&D) costs. In 2014 the company was upgraded again by all rating agencies to mid to high BB. The company has come a long way in terms of credit quality improvement since the early 2000s when it was rated B2/B/BB-. We would expect the improvement to continue although at a slower pace….”. As a side remark here: Afren, which is not active in the US but whose main focus is instead Africa in general and Nigeria in particular, has defaulted on its bonds in the meantime.
ŸMost importantly though we concluded that “…Bonds of Chesapeake couldn’t escape the generally negative trend in the industry lately, and prices have fallen significantly from their peak in August (the CHK 5.75% 2023 bond is down more than 8% since then). We don’t think it is a smart idea to catch this falling knife right now and we would wait for reliable signals that oil and natural gas prices hit bottom. But once that is the case we would consider Chesapeake bonds, among the few US domestic HY names that might be tradable for investors oversea, attractive high yield investments and accordingly would consider adding one of their bonds to the USD Top Picks provided liquidity is there. Moreover, even the EUR issue with its rather short maturity offers great relative value if compared to what else is out there on offer and we may also add this issue to the € Top Pick list. Too bad only that it has a high coupon and hence a price way above par….”
ŸIt was only two days later that we came up with an update on Chesapeake due to major company specific news, and our take back then was that “….in the midst of this difficult market the company just announced major positive news that surprised everybody. Chesapeake will do a substantial asset sale which includes 1,500 wells and drilling rights in Pennsylvania and West Virginia in order to focus on drilling fields that are expected to have better revenue potential. The cash worth USD 5.4 billion for this transaction could mean quite an improvement for its balance sheet as it comes on top of USD 3 billion of divestures that it already made public so far this year. Among these for instance was the IPO of its oilfield services business, Chesapeake Oil Services, which is now called Seventy Seven Energy. So this is clearly an additional very positive step in the new CEO’s plan to make the company more profitable and ultimately to be able to reduce leverage….S&P commented that it revised its BB+ rating outlook from stable to positive with an increasing likelihood of an upgrade should the sales proceeds be used to further reduce debt…”. This news made us change our falling knife view instantly and as a result we added that “…we decided today to add the EUR Chesapeake 6.25% 15.01.2017 bond with the ISIN XS0273933902 to our ISA Fixed Income Top Picks…”.
ŸOur Chesapeake Top Pick worked well until May, when the bonds still traded in the 107-108 context and even in mid-July they were still trading around 106. But then on 21 July the company announced its intention to halt its quarterly dividend for the first time in 14 years and to sell more assets in an effort to further reduce costs and complexity, save cash and protect its balance sheet from further deterioration as slumping energy prices are significantly pressuring cash flow. The change in dividend policy will save the company some USD 240 million a year on top of the USD 75 million it will save in annual preferred dividends by selling a portfolio of properties that will eliminate some future financial and drilling obligations.
ŸWhile intuitively it makes sense that the company’s stock would react negatively on such news (-9.5% on the announcement day), that is not the case for the bonds as the news should be taken positively by credit investors. And yet bonds dropped sharply as well (USD CHK 5.75% 2023 -6.3%). It seems that while credit investors might have felt increasingly unnerved about the rapid depletion of cash reserves (which were down 50% since end-2014), they may have taken the cancellation of the dividend as a evidence that the future was much worse than anticipated.
ŸAdmittedly most recent operational trends have been worrying with EBITDA more or less at half the levels it used to be in previous years, which is hardly a surprise on the back of massively lower oil (-50% vs average 2014) and natural gas (-32% vs average 2014) prices. At the same time, however, the company has started to reduce its complexity and its debt burden quite aggressively through a number of transactions in 2013-2015, with the result that adjusted debt will have fallen by more than 7 billion at the end of 2015 from around USD 20 billion in 2012. What’s more, capex is still expected at around USD 3.5-4.0 billion, which looks very modest compared with the record USD 17.7 billion spent in 2008 alone or the combined USD 43billion spent between 2010-2012 (Table 1). While this 4 billion spending still exceeds operating cash flow by around 2 billion, further declines in it should eventually lead to a balance between spending and cash flow in 2016 and beyond.
ŸBut it is clear that despite the very aggressive reduction of debt levels and disposals of assets, the very commodity environment itself puts a lot of pressure on Chesapeake’s credit metrics with leverage (4x, up from 2.5x in 2014) and interest rate coverage (4x as well and down from almost 8x in 2014) now pretty weak for the high-BB rating. Given the massive operational headwind, it is certainly reassuring that Chesapeake continues to enjoy a solid liquidity situation. Apart from the USD 2 billion in cash, the company also has a USD 4 billion undrawn credit facility available for borrowing, which will not mature until end-2019 and which ranks pari passu with the bonds. The financial covenants of the facility include among other things a Net Debt / EBITDA limit of 4x and as mentioned above this covenant could actually be breached by the end of this year. It is our base case scenario that Chesapeake will obtain the necessary covenant relief from its banks, given its big efforts so far already taken to reinvent itself and readjust its financial profile to the new commodity reality. The company has very limited debt maturities until the end of 2016 with only one USD 500million bond maturing in March 2016 and an outstanding USD 396 million convertible bond maturing in 2035 but putable by investors at par in November 2015. We do not expect those upcoming debt maturities to pose a serious liquidity risk for the company for all the reasons mentioned above. But of course we cannot rule out a scenario that going forward bank debt could increasingly be provided only on a senior secured basis, that would put bond investors at a significant disadvantage and make the bonds much more risky. But that is more a medium to long term concern and only under the assumption that a) market prices for oil and natural gas do not recover at all for a long time or go even lower, and the company is not successful at all in its effort to further dispose of its huge asset base of proven reserves.
ŸAll in all then: while Chesapeake is certainly one of the more complex credit stories we have been following over the past few years, we still feel comfortable holding on to our short-term EUR Top Pick that will mature in January 2017 and think the bonds are attractive, though risky, at a level around par and a yield and government spread of 6.09% and 634bps respectively (Table 2). We believe that the company is doing everything to protect its business and its balance sheet to weather the dramatic commodity storm successfully. However, we don’t think that the recent huge sell-off in the company’s longer dated bonds, which for example drove the price of the USD CHK 5.75% 2023 bond (ISIN US165167CL94) down some 30% from around par in late May to the low 70s for a yield of around 11%, already represents a buying opportunity. Maybe that level is great in the longer term, but we believe there is more downside still in the short term. We intend to review Chesapeake, which we thought was going to Investment Grade ten months ago but which we’d now consider more a single-B than a high BB credit given ultra-challenging circumstances that could be here a quite some time, again towards the end of the year or early next. By then we will hopefully have a better understanding about the longer term prospect of the company and its business.
CHESAPEAKE ENERGY CORP[FONT="] [/FONT]
CHK 6.25% 15/01/2017; ISIN : XS0273933902
Ask price: EUR 100.29, YTM 6.12%, 637 bp over Bunds
Official credit rating: BB+/Ba1 (S&P / Moody’s)
ŸIt was back in mid-October 2014 when we had a first high level look at US High Yield Energy as a subsector of the USD High Yield universe. Although not actively involved due to a lack of understanding for and access to that large but predominantly US centric segment, we still decided to produce a short comment on recent market developments. High Yield Energy had just undergone a big underperformance in response to the first wave of a massive sell-off in energy prices, which had started in the middle of the summer when oil prices (Brent quality) fell more than 20% from levels of around USD 110-115 to the mid-80s in mid-October or the lowest levels since late 2010 (Chart 1). The underperformance was indeed an eye catcher as underperformance of Energy bonds had been a highly unusual event since 2001: During that 14-year period Energy had outperformed the broader High Yield market by more than 100% on a cumulative basis.
ŸWe also said back then that “…The US High Yield Energy sector includes many mid-sized names that we in Europe luckily don’t know and don’t cover as they are by and large regional or national stories at best. Some of us may have heard of the more prominent names in the sector, such as Chesapeake Energy, UK-based Afren or El Paso Corp (which was taken over by Kinder Morgan in 2012). Chesapeake (Ba1/BB+/BB) in particular is an interesting name. It is the second largest issuer of USD Energy bonds, and it is covered and “Hold” rated by JB fixed income research. After a steep decline of its stock price (-32% year-to-date) the company’s market cap has fallen to US$ 11.6bn. Over the 12 months through June the company generated some US$ 20bn of revenues and 5bn in EBITDA.”
ŸWe went on to say that “…Chesapeake is one of the largest independent exploration and production (E&P) companies in North America. The company operates solely onshore in the US with exposure to multiple basins from the Rocky Mountains east to the Appalachian Basin. Key positives for the company are its very large proved reserve and production scale, sizeable high quality acreage positions in multiple basins across the US, and competitive drill bit finding and development (F&D) costs. In 2014 the company was upgraded again by all rating agencies to mid to high BB. The company has come a long way in terms of credit quality improvement since the early 2000s when it was rated B2/B/BB-. We would expect the improvement to continue although at a slower pace….”. As a side remark here: Afren, which is not active in the US but whose main focus is instead Africa in general and Nigeria in particular, has defaulted on its bonds in the meantime.
ŸMost importantly though we concluded that “…Bonds of Chesapeake couldn’t escape the generally negative trend in the industry lately, and prices have fallen significantly from their peak in August (the CHK 5.75% 2023 bond is down more than 8% since then). We don’t think it is a smart idea to catch this falling knife right now and we would wait for reliable signals that oil and natural gas prices hit bottom. But once that is the case we would consider Chesapeake bonds, among the few US domestic HY names that might be tradable for investors oversea, attractive high yield investments and accordingly would consider adding one of their bonds to the USD Top Picks provided liquidity is there. Moreover, even the EUR issue with its rather short maturity offers great relative value if compared to what else is out there on offer and we may also add this issue to the € Top Pick list. Too bad only that it has a high coupon and hence a price way above par….”
ŸIt was only two days later that we came up with an update on Chesapeake due to major company specific news, and our take back then was that “….in the midst of this difficult market the company just announced major positive news that surprised everybody. Chesapeake will do a substantial asset sale which includes 1,500 wells and drilling rights in Pennsylvania and West Virginia in order to focus on drilling fields that are expected to have better revenue potential. The cash worth USD 5.4 billion for this transaction could mean quite an improvement for its balance sheet as it comes on top of USD 3 billion of divestures that it already made public so far this year. Among these for instance was the IPO of its oilfield services business, Chesapeake Oil Services, which is now called Seventy Seven Energy. So this is clearly an additional very positive step in the new CEO’s plan to make the company more profitable and ultimately to be able to reduce leverage….S&P commented that it revised its BB+ rating outlook from stable to positive with an increasing likelihood of an upgrade should the sales proceeds be used to further reduce debt…”. This news made us change our falling knife view instantly and as a result we added that “…we decided today to add the EUR Chesapeake 6.25% 15.01.2017 bond with the ISIN XS0273933902 to our ISA Fixed Income Top Picks…”.
ŸOur Chesapeake Top Pick worked well until May, when the bonds still traded in the 107-108 context and even in mid-July they were still trading around 106. But then on 21 July the company announced its intention to halt its quarterly dividend for the first time in 14 years and to sell more assets in an effort to further reduce costs and complexity, save cash and protect its balance sheet from further deterioration as slumping energy prices are significantly pressuring cash flow. The change in dividend policy will save the company some USD 240 million a year on top of the USD 75 million it will save in annual preferred dividends by selling a portfolio of properties that will eliminate some future financial and drilling obligations.
ŸWhile intuitively it makes sense that the company’s stock would react negatively on such news (-9.5% on the announcement day), that is not the case for the bonds as the news should be taken positively by credit investors. And yet bonds dropped sharply as well (USD CHK 5.75% 2023 -6.3%). It seems that while credit investors might have felt increasingly unnerved about the rapid depletion of cash reserves (which were down 50% since end-2014), they may have taken the cancellation of the dividend as a evidence that the future was much worse than anticipated.
ŸAdmittedly most recent operational trends have been worrying with EBITDA more or less at half the levels it used to be in previous years, which is hardly a surprise on the back of massively lower oil (-50% vs average 2014) and natural gas (-32% vs average 2014) prices. At the same time, however, the company has started to reduce its complexity and its debt burden quite aggressively through a number of transactions in 2013-2015, with the result that adjusted debt will have fallen by more than 7 billion at the end of 2015 from around USD 20 billion in 2012. What’s more, capex is still expected at around USD 3.5-4.0 billion, which looks very modest compared with the record USD 17.7 billion spent in 2008 alone or the combined USD 43billion spent between 2010-2012 (Table 1). While this 4 billion spending still exceeds operating cash flow by around 2 billion, further declines in it should eventually lead to a balance between spending and cash flow in 2016 and beyond.
ŸBut it is clear that despite the very aggressive reduction of debt levels and disposals of assets, the very commodity environment itself puts a lot of pressure on Chesapeake’s credit metrics with leverage (4x, up from 2.5x in 2014) and interest rate coverage (4x as well and down from almost 8x in 2014) now pretty weak for the high-BB rating. Given the massive operational headwind, it is certainly reassuring that Chesapeake continues to enjoy a solid liquidity situation. Apart from the USD 2 billion in cash, the company also has a USD 4 billion undrawn credit facility available for borrowing, which will not mature until end-2019 and which ranks pari passu with the bonds. The financial covenants of the facility include among other things a Net Debt / EBITDA limit of 4x and as mentioned above this covenant could actually be breached by the end of this year. It is our base case scenario that Chesapeake will obtain the necessary covenant relief from its banks, given its big efforts so far already taken to reinvent itself and readjust its financial profile to the new commodity reality. The company has very limited debt maturities until the end of 2016 with only one USD 500million bond maturing in March 2016 and an outstanding USD 396 million convertible bond maturing in 2035 but putable by investors at par in November 2015. We do not expect those upcoming debt maturities to pose a serious liquidity risk for the company for all the reasons mentioned above. But of course we cannot rule out a scenario that going forward bank debt could increasingly be provided only on a senior secured basis, that would put bond investors at a significant disadvantage and make the bonds much more risky. But that is more a medium to long term concern and only under the assumption that a) market prices for oil and natural gas do not recover at all for a long time or go even lower, and the company is not successful at all in its effort to further dispose of its huge asset base of proven reserves.
ŸAll in all then: while Chesapeake is certainly one of the more complex credit stories we have been following over the past few years, we still feel comfortable holding on to our short-term EUR Top Pick that will mature in January 2017 and think the bonds are attractive, though risky, at a level around par and a yield and government spread of 6.09% and 634bps respectively (Table 2). We believe that the company is doing everything to protect its business and its balance sheet to weather the dramatic commodity storm successfully. However, we don’t think that the recent huge sell-off in the company’s longer dated bonds, which for example drove the price of the USD CHK 5.75% 2023 bond (ISIN US165167CL94) down some 30% from around par in late May to the low 70s for a yield of around 11%, already represents a buying opportunity. Maybe that level is great in the longer term, but we believe there is more downside still in the short term. We intend to review Chesapeake, which we thought was going to Investment Grade ten months ago but which we’d now consider more a single-B than a high BB credit given ultra-challenging circumstances that could be here a quite some time, again towards the end of the year or early next. By then we will hopefully have a better understanding about the longer term prospect of the company and its business.
96.45, ytm 11.55%
anche se mi sembra strano vedendo sulle varie borse un calo netto
Myskin
Forumer stoico
se scende ancora accumulo
taglio impegnativo, 50k
però anche secondo me vale la pena
e qualcosina scenderà ancora
Julius Baer research
fabriziof
Forumer storico
Grazie io ho chesapeake 5,375 2021 preso a 81,84
è un po' che la seguo e a parer mio ha un ottimo potenziale
soffrirà almeno sino a fine anno ma quando avranno ultimato la razionalizzazione dei costi e venduto alcuni assets unito alla ripresa del prezzo del petrolio prevista a metà 2016 i bonds ripartiranno verso l'alto
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HIGH YIELD e oltre, verso frontiere inesplorate, vol.3
