CHK - Valens Credit Report - 2017 09 21
- Credit markets are grossly overstating CHK's fundamental credit risk with a CDS of 806bps and a YTW of 7.220%, relative to an Intrinsic CDS of 161bps and an Intrinsic YTW of 3.420%. Furthermore, Moody's is materially overstating CHK's fundamental credit risk, with its Caa1 rating seven notches lower than Valens' XO (Baa3) credit rating
- Incentives Dictate Behavior™ analysis highlights that CHK's management compensation framework should focus them on improving asset utilization, expanding margins, and growing revenues, leading to higher cash flows available for servicing obligations. Additionally, management is incentivized to reduce leverage and boost liquidity, a positive for creditors. Moreover, management members are not well compensated in a change in control event, limiting event risk for creditors - Earnings Call Forensics™ of the firm's Q2 2017 earnings call (8/3) highlights that management is confident that their 2017 capital program will improve their margins, and that their capital deployment is seeing excellent results as they continue to learn and improve. They are also confident about the improved capital efficiency of their refracs
- Due to credit markets' overly bearish sentiment, CHK is trading at a deep discount to its asset values and at a historically low valuation. While downside is likely limited, if credit market spreads tighten, as iCDS and iYTW imply is warranted, there could be material credit-driven equity upside
Chesapeake Energy is a holding company. Through its subsidiaries, the company is an independent exploration and production company engaged in the acquisition, exploration and development of properties to produce oil, natural gas and natural gas liquid from underground reservoirs. The company owns a portfolio of onshore U.S. liquids and natural gas assets. The company has positions in the resource plays of the Eagle Ford Shale in South Texas, the stacked pay in the Powder River Basin in Wyoming and the Anadarko Basin in northwestern Oklahoma. The company's natural gas resource plays are the Marcellus Shale in the northern Appalachian Basin in Pennsylvania and the Haynesville/Bossier Shales in northwestern Louisiana.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
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