Chesapeake Suffers From Dilution
Ruthie Ackerman, 11.28.08, 5:55 PM ET

Natural gas producer Chesapeake Energy has been hit hard by falling energy prices and increased inventories, which has left the company short on cash. On Friday the company moved to issue common shares to raise nearly $1.8 billion in capital, and investors moved to the sidelines.

Late Wednesday Chesapeake Energy announced in two filings with the Securities and Exchange Commission that it will issue shares worth as much as $1.0 billion before fees and actually registered 50.0 million shares worth at much as $791.0 million for potential sale. America's largest producer of natural gas wants the money to fund its drilling and exploration activities.

Deutsche Bank analyst Shannon Nome wrote in a note to investors on Friday that the company isn’t being driven by a “pressing need for cash,” but that the issuance affords the company “flexibility.”

Shareholders took that idea with a grain of salt. The company's stock fell 15.1%, or $3.06, to $17.18, although volume was light in the half-day session. Chesapeake stock has tumbled 56.2% since the beginning of the year.

The company said cash flow, borrowings and cash on hand have not been enough to pay for capital expenditures, forcing it to slash its budget through 2010.

Earlier this month, Chesapeake sold a stake in its U.S. shale gas assets to Norway's StatoilHydro for $3.4 billion. (See “Chesapeake Makes A Shale.”)

Nome said that at Friday’s stock price, the full issuance would imply a 17.0% expansion to its third-quarter share count. Nome pointed out that the filings were not a quick fix: “No shares can be issued under the acquisitions shelf filing until the SEC declares it effective, and Chesapeake stated that no issuance under the distribution agency agreements is planned until 2009, ‘from time to time and as market conditions warrant'.”

Nome lowered the price target on Chesapeake to $29 from $32 on some equity dilution and liquidity worries but maintained a "buy" rating. “We believe today's move over-discounts these concerns,” Nome said.