Chesapeake Energy rallies on word debt will be taken out at maturity; Whiting declines on downgrade

By Stephanie N. Rotondo

Seattle, Feb. 12 – Distressed debt investors were again zeroing in on oil and gas names on Friday, due in part to a 10.5% bounce in domestic crude oil prices.

Crude closed at $28.98 a barrel as truce talks in Syria helped to ease geopolitical concerns. Also helping matters were further comments from OPEC producers about a willingness to curb production amid the low-priced environment.

Chesapeake Energy Corp. debt, however, was also being driven higher by news the company plans to pay off its $500 million in debt maturing next month. The Oklahoma City-based company’s debt has been active for most of the week, but lower as the market speculated that not only would those notes go unpaid, but that a bankruptcy filing could be near.

However, not all oil and gas credits were rising with the general trend of the market.

Whiting Petroleum Corp. was actively traded during the session, as the company’s debt declined in response to a rating downgrade. The company’s convertible debt, as well as its stock, also took a hit.

Elsewhere in the space, Chaparral Energy Inc.’s 7 5/8% notes due 2022 dropped 4 points to 8, according to a trader.

The trader noted that the loss compared to levels seen “a couple weeks ago.”

The decline came as the company said it had drawn down $141 million from a credit agreement inked with JPMorgan Chase.

Chesapeake gets a bounce

Chesapeake Energy plans to take out its $500 million of 3¼% notes maturing next month, Bloomberg reported Friday.

The company plans to use cash and credit to make the payment, the article said, citing “a person with knowledge of the matter.”

“The bonds spiked a little bit,” the trader said, pegging the issue at 92 bid, 93 offered, up 6 points.

The 6½% notes due 2017 were up a similar amount at 30, the trader said. Both the 6 5/8% notes due 2020 and the 5 3/8% notes due 2021 improved by 1½ points to 15 and 14½, respectively.

Another market source deemed the 6 5/8% notes 2 points better at 15 bid.

Chesapeake debt got battered earlier in the week on rumors the company had hired Kirkland & Ellis LLP to look into restructuring options, including a bankruptcy filing. Though the company later issued a statement refuting any plans for bankruptcy – also noting that Kirkland has been its counsel since 2010 – investors weren’t swayed and the bonds continued to drop throughout the week.

Whiting weakens

A rating downgrade from Moody’s Investors Service was meantime weighing on Whiting Petroleum’s debt.

One trader said that the name took up the top four slots in trading activity for the day. Both the 5¾% notes due 2021 and the 5% notes due 2019 traded in size at least 40 times, he said.

The 5¾% notes dropped half a point to 49¾, as the 5% notes lost over 3½ points, closing at 40¾.

The 6½% notes due 2023 were also weaker, falling 3 points to 40, the trader said. As for the 6½% notes due 2018, they traded off “about 25 points” to 27.

The trader noted that the issue hasn’t traded in “a week and change,” thus the large decline.

Trading was also active in the company’s 1.25% convertible notes due 2020.

A trader said the paper traded at 30 early in the session, which compared to levels around 40 as of Thursday’s close.

However, the paper improved intraday, ending in a 24.25 to 24.5 context.

The stock was meantime initially trading down to $4.40 from $4.90, according to the trader. But even that pared some of its losses, ending off 41 cents, or 8.35%, at $4.50.

The trader speculated that despite a bounce in oil prices on Friday – the commodity was up over 8% at mid-morning – Whiting was playing a game of catch-up with some of its peers. When oil prices first started to decline, the trader explained, some bonds shook it off, not believing that the weakness would last. But as prices have stayed depressed for about a year and a half, some credits, such as Whiting, are now feeling the “accumulative” effect of the drop.

That, however, raises the question, the trader said: “How many months behind the other guys are they?”

On Thursday, Moody’s cut its corporate family rating on Whiting to Caa1 from Ba2. The rating agency cited the likelihood of weak cash flows this year and into the next as hedges start to expire. On top of that, the oil and gas producer has a heavy debtload, increasing the possibility of a debt restructuring.

“While we recognize the steps that Whiting has undertaken in response to weak pricing levels, we believe the ability to further adjust to a lower price environment will be more challenging and the timing and execution of assets sales more uncertain,” Moody’s said in its statement.

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