chk

[Jason Strasser (strassa2)]

I'm getting curious about how a piece of news exactly influences the price of a stock. It seems to me that there are planned events like an earnings announcement and that if the investor's concensus is hit then the stock price doesnt change because in theory it has already been priced into the stock.

On Wed Aug 8, after trading, Chesapeake announced:

"OKLAHOMA CITY (AP) -- Oil and natural gas exploration company Chesapeake Energy Corp. said Wednesday it will offer $500 million in convertible senior notes.
The company said it will use proceeds from the offering to pay off debt from its revolving credit facility.

The 2.50 percent senior notes due 2037 are convertible into cash and common stock.

Deutsche Bank Securities will act as sole book-running manager for the offering.

Shares of Chesapeake Energy Corp. fell $1.55, or 4.4 percent, to $33.88 in after hours trading. They closed the regular session down 15 cents at $35.43." --AP

This seems like a very isolated look at hows one piece of news effected the prices.

What was known by the street before the announcement:

1) CHK has had negative cash flow for at least the past year.

2) The credit market is getting murdered. I would guess that due to the nature of CHK and the natural gas market that because of the large amount of income generated by the business that people are probably more willing to buy debt of utility companies moreso than most other companies. That being said, because CHK has a negative cash flow and no cash on hand, in order to continue its quick growth rate (which has been priced into the value of the stock) it will have to issue new debt in unfavorable conditions.

3) Aubrey McClendon has a lot of money and his circle of OK business partners (See new orleans hornets). I personally know him through a college roommate, so I've always monitored the stock (I do not own any). It was noted in the journal that CHK might be able to look for in-house funding. So I'm guess the debt markets were not its only choice.

So the news comes out that they are issuing more long term debt to keep the revolving credit door rotating, and then boom the stock drops 5%.

My question is this: the balance sheet indicated to anyone with a brain that CHK would have to look for ways to borrow money at some point in the near future. They had 2 main options, and chose one. Wasn't this priced into the stock? Was the drop in the stock due to the fact that the timing of the refinancing was a certain probability and that this probability distribution could've included points far enough in the future when credit conditions might've been more favorable then they are now? Was it due to the size of the loan? How about the fact that the notes are convertible into stock--was the street worried about the dilutive effect of this issue? I have no real feel for any of this stuff. I'm just looking for someone to explain to me exactly why the stock dropped 5%. Were markets inefficient?

Jason