Chesapeake Energy Corp. (NYSE: CHK) has released an update of its financial strategy, which includes the elimination of its common stock dividend, effective third-quarter 2015; the sale of CHK Cleveland Tonkawa LLC properties and adjacent assets, anticipated to close in third-quarter 2015; and the redemption of preferred shares in CHK Cleveland Tonkawa subsidiary.
Due to the current commodity price environment for oil, natural gas, and natural gas liquids, and the resulting reduction in capital available to invest in its high-quality assets, Chesapeake will eliminate its common dividend effective 2015 third quarter and redirect the cash into its 2016 capital program to maximize the return available to its shareholders.
Additionally, Chesapeake, through one of its affiliates, has also signed a definitive agreement to sell substantially all of the properties held by CHK Cleveland Tonkawa LLC to FourPoint Energy LLC. Chesapeake has also signed a definitive agreement to sell noncore adjacent properties centered in Roger Mills and Ellis counties in Oklahoma to FourPoint for approximately $90 million in cash. Chesapeake’s net production from the combined assets was approximately 15 thousand barrels of oil equivalent per day in second-quarter 2015.
CEO Doug Lawler commented, “We received approval from our board of directors to eliminate the common stock dividend of $0.35 per share annually, which is applicable to the 2015 third quarter… The elimination of the common stock dividend will save approximately $240 million annually. This, along with the redemption of the preferred shares in our CHK Cleveland Tonkawa subsidiary, is part of a broader disciplined approach that began two years ago to decrease the company’s financial complexity and increase our liquidity. The company’s liquidity position remains extremely strong with more than $2 billion of unrestricted cash on our balance sheet and an undrawn $4 billion revolving credit facility as of June 30, 2015.”
Chesapeake will use the proceeds from the sale of the CHK Cleveland Tonkawa properties, plus other cash from CHK Cleveland Tonkawa, to redeem its preferred interest in CHK Cleveland Tonkawa. Other than customary adjustments to the purchase price and certain indemnity obligations in connection with the sale, Chesapeake will not be required to pay any additional amounts for the redemption.
Upon closing of the transaction, Chesapeake will eliminate approximately $75 million in annual preferred dividend payments, the 3.75% overriding royalty interest payments associated with the properties, and all related future drilling and override conveyance commitments.
Analysts from Wunderlich Securities commented, “Liquidity is still in good shape as CHK attempts to get to cash flow neutrality. The company currently has $2 billion in cash and an undrawn $4 billion credit facility that provides ample liquidity. Though the company has gone through about $2 billion in cash during 1H15, we believe with the OFS pricing reductions and a lower rig count in 2H15, as well as the financial moves discussed today, we should see a much lower cash burn as the company approaches neutrality even in a bad commodity price environment.”