One of the highest fliers in the nation’s fracking boom is crashing hard. Chesapeake Energy, the country’s second-largest natural gas producer, has seen its stock plunge more than 15 percent in two days.
Company bond prices have also fallen. And there’s been a surge in bets that Chesapeake will default on its debt.
“There’s a large number of investors who are concerned about the ability for certain companies to be able to repay their debt,” said Rob Thummel of Tortoise Capital Advisors in Kansas City. “And they are basically trying to profit off the company’s inability to do that.”
Most natural gas drillers are hurting from energy oversupply and low prices. If this winter is a warmer one, as predicted, low demand for gas heat will hurt even more.
But Chesapeake is particularly in hock. Early on in the fracking boom of the past decade, it went on a land grab. The company bought up drill leases with borrowed money.
“Several years ago, Wall Street said ‘You know, the more acreage the better. Why don’t you borrow more money and drill more wells?'” said analyst Mike Breard at Hodges Capital Management in Dallas. “And now it’s ‘you idiot, why did you borrow all that money?'”
Now, the company is under new management. Founder Aubrey McClendon has left, and it’s trying to pay off debt.
But right now everything Chesapeake has to sell – gas, oil, land leases – fetches ultra low prices. So it’s trying to hold its assets through the winter.
“The bottom line is you try to survive,” said analyst Jason Wangler at Wunderlich Securities in Houston, “to get through this downturn, however long it is – which of course no one really knows — and get to the other side to where hopefully prices will recover.”
Prices that are the lowest in three and a half years.