Chesapeake Energy Corporation (CHK): The Trouble Of Getting Paid Early

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  • Try and avoid investing in shares of gas & oil companies with massive debt and similar massive assets. When pushed against the wall with pending bond payouts such companies are likely to dispose of otherwise lucrative assets. This will hinder the profitability of the company and will have a direct impact on shareholders. You can try and spot the next troubled candidate by carefully reviewing the balance sheet. Take SandRidge Energy Inc. (NYSE:SD) for example. This energy company has equity valued at $2.9 billion with total debt almost twice that amount. With assets worth almost $10 billion, SandRidge’s shareholders face a possible liquidation that will hurt their share price. Another company worth paying attention to is Plains Exploration & Production Company (NYSE:PXP). The company’s equity is currently worth only $6 billion, while the company owes $11.5 billion to bondholders. With assets in the amount of $17 billion, it’s a pretty good guess that the company will go through some kind of liquidation in the near future.

    The Foolish bottom line

    Chesapeake Energy Corporation (NYSE:CHK) is a profitable company with mountains of debt and similar mountains of lucrative assets. When these two components clash, it’s likely to be the former that prevails. Bondholders will end up getting paid, at the expense of shareholders, following a pricey liquidation of income producing assets. In order to avoid such a painful course of events, shareholders must recognize and avoid such dangerous situations ahead of time. Otherwise, shareholders might find themselves paying a premium for assets that will be liquidated away, right into the hands of bondholders with the first glimpse of a cash flow deficit in the company.

    The article The Trouble Of Getting Paid Early originally appeared on Fool.com and is written by Shmulik Karpf.

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