Chesapeake Energy Cumulative Convertible Preferred

Chesapeake Energy Cumulative Convertible Preferred (CHK-PD) offer an appealing risk reward profile. 

Chesapeake Energy Cumulative Convertible Preferred

  • Symbol: CHK-PD
  • Principal Amount: $100
  • Coupon Rate: 4.5%
  • Convertible: 2.2727 – $43.9998
  • Call Date: 9/15/2010
  • Mature Date: No mature date
  • Distribution Dates: Quarterly (Suspended)
  • Current Price: $24.30

Chesapeake has been hit by the low oil and natural gas prices. However, there are some positives that gives a reasonable chance that the company will survive:

  • Commodity prices have gone up. Oil prices are hovering around $50. David Einhorn has made a bet on recovering natural gas prices.  
  • The company has been exchanging debt for equity. Although this is not great for equity investors, this is really good news for bond and preferred holders. More of these announcements will be a boon to both bond and preferred prices. 
  • The company has been divesting assets to pay down debt.
  • Amended its $4.0 billion credit facility

If Chesapeake survives and eventually starts paying dividend, this preferred could start approaching $100. Also, the dividend are cumulative – which means that it will accumulate while the dividends are suspended. To me, there is a greater than 50% chance that Chesapeake survives. So, it is a good gamble to take on this. I would treat it as a long term option investment.

Here is details on the preferred. 

Disclosure: I am long CHK-PD