CHK Valens Credit Analysis – Operational sustainability, substantial capex flexibility, and a robust recovery rate indicate that credit markets and ratings agencies are overstating fundamental credit risk

• Credit markets are grossly overstating CHK’s fundamental credit risk with a CDS of 806bps and a YTW of 7.220%, relative to an Intrinsic CDS of 161bps and an Intrinsic YTW of 3.420%. Furthermore, Moody’s is materially overstating CHK’s fundamental credit risk, with its Caa1 rating seven notches lower than Valens’ XO (Baa3) credit rating
• Incentives Dictate Behavior™ analysis highlights that CHK’s management compensation framework should focus them on improving asset utilization, expanding margins, and growing revenues, leading to higher cash flows available for servicing obligations. Additionally, management is incentivized to reduce leverage and boost liquidity, a positive for creditors. Moreover, management members are not well compensated in a change in control event, limiting event risk for creditors
• Earnings Call Forensics™ of the firm’s Q2 2017 earnings call (8/3) highlights that management is confident that their 2017 capital program will improve their margins, and that their capital deployment is seeing excellent results as they continue to learn and improve. They are also confident about the improved capital efficiency of their refracs
• Due to credit markets’ overly bearish sentiment, CHK is trading at a deep discount to its asset values and at a historically low valuation. While downside is likely limited, if credit market spreads tighten, as iCDS and iYTW imply is warranted, there could be material credit-driven equity upside