Oil and natural-gas producer Chesapeake Energy (NYSE:CHK) will skip a payment to shareholders and instead use the cash to retire its debt, the company said Jan. 25.
The decision affects dividend payments on Chesapeake’s outstanding convertible preferred stock. Chesapeake said suspending the payment will allow it to retain $170 million of additional cash yearly—funds which will be used to purchase debt.
Volatile energy prices weighed heavily in the Oklahoma City company’s decision.
Both oil and stock prices—which have been moving in tandem—were down again on Jan. 25 following a short-lived rebound on Jan. 22.
“Given the current commodity price environment for oil, natural gas and natural gas liquids, we believe that redirecting this cash toward debt retirement provides better returns for the company,” Chesapeake’s CEO Doug Lawler said in a statement. “We currently have senior debt securities trading at significant discounts, and we will continue to take advantage of that within the coming year."
Chesapeake’s measure to slash debt is the latest attempt to trim its balance sheet. On the final day of 2015, it completed a debt exchange, swapping out $3.8 billion of previously issued bonds for new 8 percent senior-secured second-lien notes due 2022. The exchange was funded with borrowings under Chesapeake’s $4 billion revolving credit facility.
Chesapeake reported a $4.695 billion net loss available to common stockholders for the third quarter of 2015. The company’s announced plan to suspend the dividend payment did little to put investors at ease, however. The company’s stock was down 9.75 percent in midday trading.
Meanwhile, Chesapeake’s financial troubles, indicative of a wider-spread commodities market issue, could be why some predict an increase in M&A activity in the energy sector this year, as stronger companies consolidate with weaker ones to preserve pricing and eliminate excess capacity.