Spending money before it is produced is becoming a common theme for Chesapeake Energy (CHK) management. It does not seem to matter if the company has a bargain basement deal or an expensive one-time deal. Management is always there with cash-in-hand ready to spend. Permanent financing is always a secondary consideration. The debt market appears willing to keep this charade going because of the sheer amount of debt on the market. But that just increases the chances of the ratings agencies shouting a warning after the horse has left the barn.

The latest spending binge is being financed through a sizable private placement. In the meantime, only about $550 million of debt will be retired. That means that about another $300 million of debt will be on the books. Maybe that $300 million will be delayed by an immediate payment of the credit line debt with the banks. But low cash flow almost guarantees that debt will increase by that $300 million sooner or later.

There is a very good chance that this alleged refinancing is a misdirection move by management. The market will be entranced by the refinancing. But there will be little attention paid to the fact that the extra money will at least temporarily pay down the bank line. The misdirection allows management to continue to borrow against the credit line. Really bad implications are.…..READ FULL COLUMN


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