Why Chesapeake Killed Its Preferred Dividend

When Chesapeake Energy Corp. (NYSE: CHK) suspended its dividend in July of last year, the company’s share price fell by about 2.5%. Friday morning the oil and gas producer said it was suspending the dividend on its preferred stock, and the common shares rose by a whopping 25% before retreating some.

In terms of cash, the July suspension saved the company about $240 million, and Friday’s suspension is expected to preserve $170 million.

CEO Doug Lawler said:

Today’s decision to suspend our preferred stock dividends will allow the company to retain approximately $170 million of additional cash per year and use these funds to purchase debt at significant discounts in the near term. 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. We currently have senior debt securities trading at significant discounts, and we will continue to take advantage of that within the coming year.

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Not a bad idea, considering a recent trade of the company’s senior secured $1.5 billion note issued in April 2014 had a yield of nearly 31%. Retiring such debt may not turn Chesapeake around, but it may keep the company from drowning in a sea of interest payments on some $10.6 billion in long-term debt. Chesapeake paid $88 million in interest expenses in the third quarter of 2015.

Shares traded up nearly 11% after about a half-hour of trading Friday, at $3.90 in a 52-week range of $2.69 to $21.49. The consensus price target on the stock is $5.00. Shares have closed above that level just twice since early December.