The stock CHK, +0.00% had run up as much as 8.2% in morning trading before pulling a sharp U-turn to drop into negative territory as oil prices turned down. The stock was down 0.6% in afternoon trading on volume of 58.9 million shares, which is enough to make the stock the most actively traded on major U.S. exchanges.
At the intraday high, the stock had recovered everything it lost the previous session, and then some, after the company announced a dilutive stock offering, and exchanged them for senior notes and convertible preferred stock.
The stock then started pulling back, as crude oil futures CLV19, -2.54% swung from an earlier gain of as much as 1.6% to a drop of 2.6% in recent trading. The selloff followed a Bloomberg report that President Trump was considering easing sanctions on Iran in order to secure a meeting with Iranian President Hassan Rouhani. Read more in Futures Movers.
The correlation coefficient between Chesapeakes stock and continuous crude oil futures is 0.73 over the past year and 0.82 over the past 10 years, according to a MarketWatch analysis of FactSet data. A correlation coefficient of 1.00 would mean the stock and crude prices are 100% in sync.
Despite Wednesdays pullback, the stock has still soared 41% since it closed at a 20-year low of $1.29 on Aug. 15.
The shares had lost 3.2% on Tuesday, after Chesapeake said it agreed with a large, multi-asset investment manager to issue 250.7 million shares of common stock and exchange them for $40 million in 5.75% convertible preferred stock, $112.7 million in 4.875% senior notes due 2022, $129.3 million in 5.75% senior notes due 2023, $155.8 million in 5.5% convertible senior notes due 2026 and $150 million in 8.0% senior notes due 2027.
The company said the exchange allowed it to retire a portion of its debt and preferred stock at a significant discount to par value, and reduce annual interest and preferred dividend payments by about $35 million.
Analyst Neal Dingmann at SunTrust Robinson Humphrey said Tuesday announcement of the debt-for-equity swap simplifies Chesapeakes capital structure, and was a good faith move by Chesapeake to signal to investors that the debt market is open, as the company look for strategic ways to reduce debt.
We view [Tuesdays] transaction as another positive step to address the $11 billion in debt and preferred equity, Dingmann wrote in a note to clients.
That said, Dingmann reiterated the hold rating hes had on the stock for the past year, saying he believes the company still needs to sell large blocks of non-core assets. He set a new $2.00 price target for the stock, which is 4.7% above current levels.
Imperial Capitals Jason Wrangler was also upbeat about how Chesapeake is using the tools it has available in the current environment to keep reducing debt and lowering near-term maturities.
While [Chesapeake] has used asset sales and other initiatives to reduce debt over the last few years, in the current environment with volatile/low commodity prices and limited capital markets access, this transaction is one of the few tools available to [Chesapeake], in our view, Wrangler wrote in a research note. Overall, the transaction makes sense financially to improve the balance sheet despite a 15% dilution to common equity.
Chesapeakes stock has lost 3.7% over the past three months but was still down 55% over the past 12 months. In comparison, the SPDR Energy Select Sector exchange-traded fund XLE, +0.10% has lost 17% over the past year while the S&P 500 index SPX, +0.72% has gained 3.6%.
Tomi Kilgore is MarketWatchs deputy investing and corporate news editor and is based in New York. You can follow him on Twitter @TomiKilgore.
By the numbers, roughly 59,000 puts and 49,000 calls have changed hands so far. The bulk of the activity has centered at the October 1.50 put, where it looks like a 39,000-contract block was likely bought to open for $331,500 (number of contracts * $0.085 premium paid * 100 shares per contract).
This is the most the put buyer stands to lose, should CHK settle above the strike at the close on Friday, Oct. 18, when the back-month series expires. Profit, meanwhile, will accumulate on a move below breakeven at $1.415 (strike less premium paid), with a CHK move all the way down to zero resulting in the maximum potential profit on the trade.
While this bet may have been made with bearish intentions, its also possible a shareholder initiated the protective put to guard recently attained paper profits. Whatever the reason, short-term CHK options are pricing in elevated volatility expectations at the moment, per the stocks 30-day at-the-money implied volatility of 84%, which registers in the 84th annual percentile. This makes it harder for options buyers to benefit from leverage.
Options traders arent the only ones chiming in on Chesapeake Energy stock today, with SunTrust Robinson Humphrey reinstating its $2 price target — matching the consensus 12-month price target for CHK. Meanwhile, three covering analysts currently maintain a “buy” rating on the security, compared to 12 “holds,” and 10 “sell” and “strong sell” recommendations.