The saga of the gas giant Aubrey McClendon's built, Chesapeake Energy, enters its endgame, when moments ago following a Debtwire report that the company has hired Kirkland and Ellis as its restructuring/bankruptcy attorney - typically a step taken just weeks ahead of a formal Chapter 11 filing - the stock has plunged 22% to $2.40, the lowest price in the 21st century, and for all intents and purposes, ever.
While energy E&P companies were dropping like flies in 2015, credit rating agencies and banks have remained awfully quiet....
As we said two days ago when looking at the paltry recoveries on their total debt that bankrupt energy debtors are generating in liquidation and bankruptcy asset sales, "the energy bankruptcy party is only just starting." And sure enough, overnight we learned that another company is preparing to throw in the towel following a Reuters report that SandRidge Energy - a shale oil and gas producer in the Mid-Continent region of the U.S. - is exploring debt restructuring options, "as the heavily indebted U.S. oil and gas exploration and production company struggles with the fallout from plunging energy prices."
With Chesapeake Energy hitting its lowest stock price since 2000 earlier this week, it was only a matter of time before US gas giant Chesapeake halted all "discretionary" cash payments, which it did moments ago when it announced it would halt dividend payments on its preferred stock.
After the lifting of sanctions in Iran this week, expectations for increased oil output has put further pressure on oil prices with both Brent and West Texas Intermediate prices dropping to the lowest levels seen this century. In the US, embattled producers are finally being forced to consider ceasing production as banks reign in on credit lines for fear of rising bad debts.
My overriding theme and the central drama for the coming year is that unexpected events can take on greater importance as the Federal Reserve ends its near-decade-long Zero Interest Rate Policy. Consensus premises and forecasts will likely fall flat, in a rather spectacular manner. The low-conviction and directionless market that we saw in 2015 could become a no-conviction and very-much-directed market (i.e. one that's directed lower) in 2016. There will be no peace on earth in 2016, and our markets could lose a cushion of protection as valuations contract. (Just as "malinvestment" represented a key theme this year, we expect a compression of price-to-earnings ratios to serve as a big market driver in 2016.) In other words, we don't think 2016 will be fun.
Chesapeake has hired restructuring advisor Evercore "to shore up its balance sheet as commodity prices extend their decline." This means that Evercore will seek to further slash its debt, almost certainly be equitizing a substantial portion of it, and handing it over as equity in the new company to CHK's bondholders. As a result the company's 2023 bonds, which were trading at par as recently as late May, just rumbled to a record low 27 cents on the dollar.
Until pro-growth, low taxation and less regulation policy changes are enacted, we don’t foresee any changes to central bank policy nor the unsustainable market divergences and asset price distortions. Expect more media propaganda on how great the economy is while the reality is another story. Early signs are that retail sales this holiday season are poor. Nobody can predict when reality will set in and equity markets revert back to pre QE levels in 2008/09. The longer this charade continues, the lower equity markets will eventually go, and in the short-term so will commodities. Then the super cycle in commodities will begin anew. Much this will hinge on next fall’s election cycle.
"On The Cusp Of A Staggering Default Wave": Energy Intelligence Issues Apocalyptic Warning For The Energy SectorSubmitted by Tyler Durden on 11/27/2015 21:24 -0500
The US E&P sector could be on the cusp of massive defaults and bankruptcies so staggering they pose a serious threat to the US economy. Without higher oil and gas prices — which few experts foresee in the near future — an over-leveraged, under-hedged US E&P industry faces a truly grim 2016. "I could see a wave of defaults and bankruptcies on the scale of the telecoms, which triggered the 2001 recession."
The traditional view of the impact of low oil prices seems to be, "It is just another cycle." Or, "The cure for low prices is low prices." We are doubtful that either of these views is right.
Now it’s getting serious.
Most people believe that low oil prices are good for the United States, since the discretionary income of consumers will rise. There is the added benefit that Peak Oil must be far off in the distance, since “Peak Oilers” talked about high oil prices. Thus, low oil prices are viewed as an all around benefit. In fact, nothing could be further from the truth...
Remember when the commodity and gas plunge was supposed to be an "unambiguously good" tailwind for discretionary US spending, something which we warned over and over would never happen as the Obamacare "mandatory tax" surge pricing for healthcare insurance more than offset and discretionary savings? Moments ago another 825 or so soon to be formerly paid workers just found out the hard way just how clueless the vast majority of the punditry was when Chesapeake energy just announced it would terminate 15% of its workforce, or about 825 of its 5,500 most recent employees, as a result of the "current oil and natural gas prices."
We have been warning for months that high-yield bonds have decoupled from equity markets, just as they did in 2007/8, and the credit cycle's turning will inevitably flow through to crush the only thing left supporting stock valuations - the irrational non-economic corporate buyback-er. However, as we detail below, time's running out and it’s getting tougher out there for our QE and ZIRP-coddled corporate junk-bond heroes.
The #1 question we get after we review correlations every month is “Why are they so high relative to long term historical norms?” Our answer is that Federal Reserve policy has been an unusually important factor in asset prices since 2009. The unusually easy monetary policy since that time (and its planning, implementation, and effect on the economy) has been a powerful unifying story in capital markets. Now, as the Federal Reserve moves to return the economy to a more “Normal” policy stance, correlations should drop. That they have not yet moved convincingly lower is a sign that equity markets may want to see the Fed actually pull the trigger.