Shares in ChesapeakeEnergy Corp. surged by more than 30% in morning trading on April 12as market confidence returned to the U.S.' second-largest natural gas producerafter it secured its $4 billionline of credit with its bank syndicate.
But analysts cautioned investors that Chesapeake's financialproblems were years in the making and still run deep.
Chesapeake's shares gained nearly 20% to $4.50 per share on April11 with nearly 67 million shares changing hands. Upgraded overnight by energyinvestment bank Tudor Pickering Holt & Co. to Hold from Sell, Chesapeakeshares soared as high as $5.90 within an hour of the opening bell on April 12.
The upgrade from Tudor Pickering Holt & Co., or TPH,came alongside an increase in crude oil prices and a more positive outlook fornatural gas prices in the second half of 2016.
But the bank's endorsement wasn't without qualifications.The price move on the stock reflected the importance of a "constructivelender update and fading of negative sentiment on the name," TPH analystssaid. "Further, the ongoing crude recovery and what we believe will be asignificant gas price rebound in 2017 should strengthen tailwinds for the equity."
TPH sees gas selling for $3.15/Mcf in 2017, increasing to$3.25/Mcf over the long-term. TPH sees the producer outspending its cash flowin 2016 but becoming cash flow neutral in 2017 if Henry Hub prices average$3.15/Mcf and oil is $50 per barrel.
"The confirmation of the $4B line of credit should bepositive since many investors were expecting a reduction, but CHK financialproblems are far from over," Oppenheimer & Co. Inc. analyst FadelGheit said in an email April 11.
Of the 53 analysts covering Chesapeake, only two have anunqualified "buy" rating, according to S&P Global MarketIntelligence data.
S&P Global Market Intelligence analyst David Holt toldhis clients April 12 that the producer is still walking a fine line between anupswing in crude oil and natural gas prices and meeting to heftier stipulationsof its new credit agreement.
"[Chesapeake's] borrowing base was reaffirmed at $4billion, with the next redetermination postponed until June 2017," wroteHolt, who rates the stock as a Hold. "While this eases liquidity concerns,we think the additional assets pledged for collateral leave little room forerror, in the absence of a further recovery in commodity prices."
TPH analysts advised management to look hard at selling itslast remaining Marcellus acreage in northeast Pennsylvania because its growthpossibilities are depressed due to a lack of pipeline capacity out of thestate.
"We think cash proceeds will first be directed towardsbuying back debt, but could be redeployed into other development areas such asthe Eagle Ford; Haynesville, where the market is concerned around midstreamcommitments; or the STACK for resource delineation," the analysts wrote.