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... serves. As a result, total property, plant and equipment was 85 % of total assets in 1998 compared to 77 % in 1997. In comparison, Unocal's PP&E was 66 % and 64 % of total assets respectively. Long-term debt increased over $ 400 million in 1998, totaling $ 920 million compared to $ 510 million in 1997. The $ 920 million was 113 % in relation to total liabilities and owners equity of $ 813 million.
In 1998, current liabilities were $ 131 million compared to current assets of $ 118 million. This resulted in a reduced current ratio of. 90 from a 1997 ratio of 1. 42. The Unocal current ratios during 1998 and 1997 were 1. 01 and 1. 29 respectively. Chesapeake has relied primarily on cash flow through financing activities during the past few years. Cash flow from operations was approximately $ 95 million in 1998 and $ 180 million in 1997, while cash flow from financing was $ 365 million and $ 278 million respectively.
Sales accounted for $ 378 million in 1998 and appear to be rising approximately 35 % annually from 1996 and 1997. However, an accurate comparison is unavailable because of the change in the companys fiscal year end. Low oil and gas prices forced Chesapeake to borrow, sell equity, and liquidate short-term investments in order to continue operations and invest in oil and gas properties. The company is dependent on the rise of prices during 1999 to continue operations and provide shareholder wealth. The company has several restrictions from being able to borrow additional funds.
Additionally, the price of stock has dropped from a high of $ 34 in 1996 to a low of $. 63 in 1998. This has further reduced the companys ability to generate cash. The current ratios for Chesapeake Energy are as follows: 1. 00 (June 96), 2. 03 (June 97), 1. 42 (December 97), and. 90 (December 98). Current liabilities remained constant over this period, ranging from a high of 19 % (June 96) to a low of 15 % (June 97), with the current level at 16 % of total assets.
Extreme levels of change in current assets caused the current ratio to fluctuate drastically. Current assets declined from a high of $ 297 million (31 % of total assets) to a current low of $ 117 million (15 % of total assets). This decline in current assets caused the deterioration of the current ratio. The acid test ratios are as follows: . 94 (June 96), 2. 00 (June 97), 1. 37 (December 97), and. 81 (December 98). As previously mentioned, current liabilities remained constant. Net accounts receivable remained flat as a percentage of total assets: 9 % in 1996, 7 % in 1997 (Both June & December), and 9 % in 1998.
Marketable securities were sold off during the past three years, decreasing from 11 % ($ 104 million) of total assets to zero. Cash decreased from 13 % ($ 124 million) of total assets in 1997 (both June & December) to 4 % in 1998. The combination of severe decreases in both cash and marketable securities are the reasons that the acid test ratio decreased so dramatically. The quick ratios are as follows: . 96 (June 96), 2. 00 (June 97), 1. 38 (December 97), and. 86 (December 98). As mentioned previously, current liabilities remained constant and current assets declined. As with the current ratio, the main reason for the deterioration of the quick ratio is the continued loss of current assets.
The above ratios and the reasons for their poor trends indicate Chesapeake is currently in a liquidity crisis. This, in combination with the increased debt liabilities, is an extreme warning to both investors and management. This condition also adds to the suspicion that assets are being sold off to fund current debt obligations. The firms ability to meet its obligations with cash, as they come due, is approximated by the cash flow liquidity ratio. As previously mentioned, solvency improved and then deteriorated as indicated by the current and quick ratios.
The trends are confirmed when looking at cash flow. From 1995 to 1997, Chesapeake's cash flow liquidity improved from 1. 47 to 1. 8. 1997 to 1998 showed a large drop in liquidity from 1. 8 to 0. 95. The companys financial statement data gives an indication as to why. From 1995 to 1997, short-term solvency improved from 1. 47 to 1. 8. When looking at the data, cash from operations rose from $ 55 million in 1995, to $ 139 million in 1997. The 1997 rise was due to a change in the accounting period.
During this same period, cash on hand rose from $ 56 million to $ 123 million and marketable securities rose from zero to $ 13 million. While cash was increasing, current liabilities rose from $ 75 million to $ 153 million. Current liabilities doubled during this period, while cash flow increased 150 %. The larger increase in cash flow, relative to short-term obligations, accounts for the improvement in solvency during the 1995 to 1997 period. During the 1997 and 1998 periods, liquidity deteriorated as shown by the decrease in the cash flow liquidity ratio from 1. 8 to 0. 95. The data indicates that cash from operations dropped approximately 32 % to $ 95 million.
When looking at the Cash Flow Statement, the large decrease in operating cash is mainly due to the large net loss incurred during the period. At the same time, cash dropped 76 % to $ 30 million while marketable securities fell to zero. Much of the cash appears to have gone to fund the companys payables and accrued liabilities. Current liabilities were reduced 15 % to $ 131 million. The larger reduction in cash flow relative to current obligations accounts for the deterioration in short-term solvency. The cash flow data confirms that Chesapeake's liquidity suffered severe deterioration.
A reduction in current liabilities is a good sign, but the little amount of cash generated and being used to fund current obligations is not enough. Cash assets are being used to fund these obligations as well. In comparison to the industry debt ratio of. 31, Chesapeake ended with a debt ratio of 1. 31 in 1998 compared to. 71 in 1997. The long-term debt to total capitalization ratio increased from. 64 in 1997 to 1. 37 in 1998, while the industry average was. 44. The tremendous increase in debt was attributable to significantly lower oil and gas prices during the past three years, and a failed drilling venture known as the Louisiana Trend.
The company was forced to liquidate assets and take on a substantial amount of debt to meet operational expenses and increase oil and gas field reserves. Chesapeake was added to the Standard & Poors Credit Watch with negative implications [Yahoo Finance, Nov. 14, 1999 ] in December of 1998. The low price of fuel during fiscal years 1996 through 1998 was the primary reason for Chesapeake's troubles. The debt incurred has covenants restricting the company from seeking additional debt and from paying dividends to preferred stock holders.
Principal on a large portion of the outstanding debt is not due until 2004 allowing the company time to improve operations. This will also give fuel prices a chance to rise, which is determinant to the companys survival. The industry average for times interest earned is 5. 2, while Chesapeake's operating profit was ($ 856) million. The ratio equated to well below zero in 1997 and 1998. In 1998, interest payments were more than $ 68 million. The financial leverage index could not be computed since there was not a return on equity.
Chesapeake overextended their credit by substantially financing with debt and has jeopardized their ability to make obligated payments for their debt and fixed costs. Bibliography: Bibliography Anonymous, Chesapeake Energy Corporation, 1998 Second Quarter Results, PR Newswire, New York, Aug 6, 1998. Anonymous, Chesapeake Energy Corporation's Ratings Placed on S&P Watch PR Newswire, New York, Jul 7, 1998; Anonymous, S&P affirms Chesapeake Energy, Nov. 1, 1999, Standard & Poors, web Chesapeake Energy Corporation, 1998 10 -K, Oklahoma City, Oklahoma. Chesapeake Energy Corporation, 1998 Annual Report, Oklahoma City, Oklahoma.
Cohen, Milstein, Hausfeld & Toll, P. L. L. C. , U.
S. District Court for the Western District of Oklahoma, September 9, 1997. Encyclopedia of American Industries, second edition. Fraser, Lyn M.
and A. Ormiston, Understanding Financial Statements, (5 th Edition), Prentice Hall, 1998. Keown, Arthur J. , David F. Scott, Jr. , John D. Martin and J.
William Petty, Basic Financial Management (7 th Edition), Prentice Hall, 1996. Morgenson, Gretchen. Pie in the Sky, Nov 5, 1999, Forbes web Stanford University School of Law Class Action Complaint Jeff Legal et al. Vs. Chesapeake Energy Corporation et al. Sep. 9, 1997, web United States Department of Energy, Energy Information Administration, International Energy Outlook Projection Systems, 1998.
Unocal Corporation, 1998 10 -K, El Segundo, California. Unocal Corporation, 1998 Annual Report, El Segundo, California. Vande water, Bob, Firm's CEO Discusses Struggle His Company Faces, Tribune Business News: The Daily Oklahoman - Oklahoma City, Oklahoma Nov. 7, 1999. Yahoo Finance, Profile Chesapeake Energy Corporation, Nov. 4, 1999, Yahoo, web Yahoo Finance, Profile Unocal Corporation, Nov. 4, 1999, Yahoo, web
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