Chesapeake’s Overpaid Board Gets A Haircut; Fitch Downgrades To BB-

Chesapeake Energy (NYSE:CHK) is no longer the high flyer it once was as the circumstances look more difficult for the gas driller each day. The past few weeks have been especially tough with CEO McClendon removed from chairmanship, the discovery of an in-house hedge fund and the announcement of a delay in asset sales. A few days back, it declared about its $4 billion short term loan to stay afloat till asset sales.

In fact, Chesapeake is grappling to generate cash as its natural gas business has floundered due to low natural gas prices. Recently, it has devised a plan to save costs which includes a 20% pay cut to its board of directors and restricting the personal use of corporate airplanes. ^[1] Separately, to add to its woes, Fitch has downgraded its Issuer Default Rating (IDR) and senior unsecured ratings from ‘BB’ to ‘BB-‘. ^[2]

See our complete analysis for Chesapeake

Board pay cut

The inefficiencies of the management and the board is evident by the present condition of the company. It is also startling to note that Chesapeake directors made an average of over $500k in 2011, nearly twice that of Exxon Mobil (NYSE:XOM) board members even though Chesapeake is nearly 40 times smaller than Exxon in terms of market cap. While a little too late, the company has decided to cut the board’s pay and also reduce air travel to pacify its investors. This will reduce the corporate expenses, which is reflected in general and administrative expenses. But, we are still doubtful about this having any sizable impact on the margins. However, any cash savings at this point for Chesapeake are welcomed.

Fitch downgrade

A heavy capital expenditure plan coupled with a humongous debt is not an ideal situation to be in. Moreover, Chesapeake’s absolute necessity to monetize a sizable chunk of its assets to meet capital expenditures and debt repayments makes it even more vulnerable.

Altogether, this leaves a dubious picture of its cash flows in the coming few quarters. A recent $4 billion additional short term debt at 8.5% interest rate doesn’t bode well either with the company’s revival plans. Indeed, it makes sense for Fitch to downgrade Chesapeake. But, these are hard times and this downgrade will make loans even more costlier for new loans as well as restructured loans (if that happens). A downgrade happens when the credibility of an investment is doubtful and the company’s ability to meet its obligations is questionable.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Chesapeake Cuts Board Pay 20%, Halts Free Plane Flights, bloomberg.com, May 19, 2012 [↩]
2. Fitch Downgrades Chesapeake Energy’s IDR to ‘BB-‘; Outlook Negative, cnbc.com, May 18, 2012 [↩]