Chesapeake Energy: Circling the Drain?

Chesapeake Energy (CHK) has lined up another $2 billion loan, it announced this week. Although CHK bravely "spun" this announcement as good news -- as it does with every public statement -- the fact is that this loan will be used to pay off the last loan, which was negotiated only 6 months ago.

In May, CHK bravely said that the sale of assets (i.e., liquidation) would allow for that loan to be repaid and would put CHK on solid ground. Instead, the assets aren't moving, and CHK continues borrowing from Peter to pay Paul.

In copyrighted stories, the on-line sources "FuelFix" and the Houston Business Journal quoted Moody's Investor Services as rating the new CHK debt "Ba3" indicating "substantial credit risk." Moody's was further quoted as saying that CHK's "... debt reduction is sliding further into the future."

CHK has nearly $16 billion in long-term debt, which it accumulated under Aubrey McClendon's go-go strategy -- aggressively leasing everything in sight, selling the gas (in advance) to get cash for yet more leases. As "dry gas" prices collapsed, Mr. McClendon announced that "wet gas" would pull CHK out of the hole that he had dug it into.

For the third quarter, just ended, CHK reported an overall loss of $2.1 billion (reflecting write-downs of the acreage and other assets against the prices for which they had expected to sell).