Shares of Chesapeake Energy Corporation CHK fell more than 5 percent after RBC downgraded the stock to Underperform from Sector Perform on limited opportunities to add value.
"Our downgrade is based on relative valuation and our view that CHK's opportunities to add value in a rising commodity market are more limited than its peers," analyst Scott Hanold wrote in a note.
"Debt reduction efforts were successful so far but much more transformation is needed to position CHK to thrive," Hanold added.
Hanold, who maintains his price target of $5, said the leverage concerns are looming on the company. Despite the energy firm has the "time and options," it's not a "layup."
The analyst noted that Chesapeake has $2.2 billion of debt principal due through 2018, and estimated there is $1.5 billion–$2.0 billion of liquidity needed through 2018.
The company has options: $3.0 billion available on bank revolver and ability to incur <$2.5 billion of first lien indebtedness. The next bank revolver redetermination is set for June 2017.
"There is the potential for an incremental $730 million that its counterparties could require posted collateral, which may reduce revolver availability," Hanold said.
Further, the analyst said the company could be in "asset harvest mode" for the foreseeable future, while the spending budget of $1.0 billion–$1.5 billion, when adjusting for divestitures, should keep production fairly flat.
The company guided to flat to -5 percent for 2016 production, but Hanold anticipates flattish results because of ongoing base production maintenance.
"We expect a 2016 FCF deficit of $900–1,000 million but that should be more neutral in 2017," Hanold added.
At the time of writing, shares of Chesapeake fell 4.63 percent to $4.74.
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