Chesapeake Energy declines as capex cut, loss widens; U.S. Steel wanes post-earnings

By Stephanie N. Rotondo

Seattle, Nov. 4 – Distressed debt investors were zeroing in on Chesapeake Energy Corp. on Wednesday after the oil producer cut its capital expenditure budget yet again.

The Oklahoma City-based company also reported a wider-than-expected loss for the quarter. Bonds weakened in response to the news.

Also weaker were U.S. Steel Corp.’s bonds. The steelmaker reported disappointing results after the market closed Tuesday.

However, a trader noted that there were “not a lot of trades” in the name.

In other earnings news, Avon Products Inc. paper declined in response to the cosmetics company’s hefty quarterly loss.

Looking ahead, Chemours is slated to bring its latest financial statement out on Thursday. Ahead of the numbers, a trader said the 6 5/8% notes due 2023 gained a point to close at 75¾.

Chesapeake cuts capex... again

A trader said Chesapeake Energy’s 5¾% notes due 2023 were “very active” on news the company had cut its capex budget for the second time this year.

The trader pegged the issue at 64, down nearly a point. The 4 7/8% notes due 2022 fell 1½ points to 63, as the 6 5/8% notes due 2020 waned almost 2 points to 68.

Another market source saw the 6 5/8% notes at 68½ bid, down a point.

Chesapeake cut its capex program for the year to $3.4 billion to $3.9 billion on Wednesday. In March, the company had dropped its budget to $3.5 billion to $4 billion, which compared to previous estimates of $4 billion to $4.5 billion.

Additionally, Chesapeake reported a net loss of $4.69 billion, or $7.08 per share. That compared to a profit of $169 million, or 26 cents per share, the year before.

The loss included a $5.42 billion writedown on the value of certain oil and gas assets.

Adjusted loss per share came to 5 cents. Analysts polled by Thomson Reuters had forecast a loss of 13 cents.

Production, however, was up 3%, when adjusted for asset sales. The company also increased its production forecast to 670,000 to 680,000 barrels per day from 667,000 to 677,000 BOEPD.

U.S. Steel pressured

U.S. Steel’s bonds saw a 2- to 3-point decline Wednesday as investors reacted to the company’s earnings release.

A trader saw the 7 3/8% notes due 2020 fall more than 3½ points to 72 7/8, as the 6.05% notes due 2017 lost 3 points, ending at 90½.

The 7% notes due 2018 slipped 2½ points to 84¾, the trader said.

At another desk, the 7% notes were seen at 84¾ bid, down almost 3 points.

For the third quarter, Pittsburgh-based U.S. Steel reported a net loss of $173 million, or $1.18 per share. That compared to a loss of $207 million, or $1.42 per share, the year before.

On an adjusted basis, net loss was $103 million, or 70 cents per share. Adjusted EBITDA came to $85 million.

In a note published Sunday, Deutsche Bank analyst Jorge Begiristain forecast a loss of 7 cents per share. Thomson Reuters was predicting a loss of 18 cents per share.

U.S. Steel and AK Steel Holdings Corp., along with other U.S. steel producers, have filed three anti-dumping trade cases this year, mostly aimed at cheaper imports from countries like China. It was reported Tuesday that the U.S. Department of Commerce was considering taxing some of the Chinese imports as much as 236%, based on preliminary findings.

It is believed that if the tariffs – which would be retroactive – would increase the price for steel, which would be a boon for U.S. producers in a market currently dealing with oversupply.

Elsewhere in the sector, AK Steel’s debt was mixed, according to a trader.

The trader placed the 7 5/8% notes due 2020 at 54¼, off almost a point. But the 8 3/8% notes due 2022 improved a point to 48.

Avon disappoints

Avon Products reported dismal earnings on Wednesday, pushing its debt into lower territory.

A trader called the 6½% notes due 2019 nearly 2 points weaker at 87½, while the 8.7% notes due 2043 dropped 1½ points to 71½.

For the quarter, Avon reported a net loss of $697 million, or $1.58 per share. For the same quarter of the previous year, the company posted a profit of $91.4 million, or 21 cents per share.

The latest results were impacted by restructuring costs, charges related to the company’s Venezuela business and an asset sale.

Revenue declined 2% to $1.67 billion.

During a conference call to discuss the results, management declined to comment on the company’s attempts to raise capital. It was first reported in September that the company was considering selling off a stake to a private-equity investor, as well as other strategic options.

“We think the only thing that kept Avon going thus far is the fact that it carried relatively little debt going into this downturn, but liquidity will continue to diminish as it draws down cash because of negative free cash flow,” wrote Carol Levenson, an analyst with Gimme Credit LLC, in a note published Wednesday afternoon.

Fannie, Freddie busy

Fannie Mae and Freddie Mac preferreds were active, but mixed, in midweek trading, just one day ahead of Fannie’s earnings on Thursday.

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) were steady at $5.00. Freddie’s 8.375% fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) also ended at $5.00, which was off a nickel.

On Tuesday, Freddie reported a $475 million loss for the third quarter, its first loss in four years.

One market source opined that the loss gives credence to the federal government’s conscription of a majority of the GSEs profits.

“Maybe the motives of the Treasury were reasonable, not the ransacking of a corporate entity, as they are being charged,” the source said.

Investors from Fairholme Capital Management to Pershing Square have challenged the government’s sweeping of the profits in an effort to set themselves up for better recoveries in the event of liquidation.

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