Chesapeake Energy (CHK, $3.78) Shares...

Indra Bhattacharjee

published in Blogs

Nov 05, 2018

Chesapeake Energy (CHK, $3.78) Shares Plummeted 23% in October - Why?

Chesapeake Energy Corporation (CHK) shares plunged by -23.4% in October, as per data provided by S&P Global Market Intelligence.

The sell-off was largely fueled by the surprising decision and the subsequent announcement by CHK to buy Wildhorse Resource Development (WRD, $22.80) for nearly $4 billion, for a combination of cash and stock.

As per the company, the deal is expected to help bolster its presence in the oil-rich Eagle Ford Shale along with the opportunity to double its production capacity by 2020. It is also expected to help accelerate the execution of CHK's deleveraging plan. CHK estimated that it will help ease its current debt load of around 4x debt to EBITDA down to 3.6x next year and 2.8x by 2020.

Sure, the acquisition of Wildhorse has the potential to transform CHK by speeding up its shift toward oil while improving its balance sheet. But what surprised the investor community was the high price paid by CHK, arguably spurring the sharp sell-off.

Investors also got nervous because of this deal’s eerie similarity to Range Resources' (RRC, $17.32) $4 billion acquisition of Memorial Resource Development in 2016. According to RRC at the time, the acquisition was anticipated to be a major boost to its strategic plan. But when the deal didn’t pan out as anticipated, it hurt RRC considerably.

The investor community is skeptical that a similar outcome could be in CHK's future, given that it is also an "overly" levered gas-focused company that's buying a private-equity-backed entity to improve its leverage profile and accelerate its strategic plan.

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published in Blogs

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published in Blogs

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published in Blogs

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published in Blogs

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published in Blogs

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published in Blogs

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published in Blogs

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published in Blogs

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