Chesapeake confident asset sales will help ease financial concerns

[Editor's note: Story updated May 16, loan increased to $4 billion]

Oklahoma City independent Chesapeake Energy Corp. is confident it will complete assets sales to help resolve financial concerns, its chief executive officer told analysts and investors during a conference call in which he also outlined a new $3 billion loan.

The unsecured term loan later was increased to $4 billion based on what Chesapeake called "strong investor demand." The loan was syndicated to a large group of institutional investors. Net proceeds of the loan, estimated at $3.8 billion, will be used to repay debt and for general corporate purposes, the company announced May 15.

“We will get our assets sales done,” Aubrey McClendon said May 14. He said the company decided against proceeding with a volumetric production payment (VPP) financing. The VPP would have brought cash to Chesapeake for future production from the South Texas Eagle Ford shale.

Chesapeake’s board previously announced plans to name an independent, nonexecutive chairman, as well as renegotiate the terms of the company’s founder well participation program (FWPP) with McClendon (OGJ Online, May 2, 2012).

The FWPP was renegotiated to expire June 30, 2014, which is 18 months before the end of its original term of Dec. 31, 2015.

The independent continues working toward previously announced debt-reduction goals despite low US natural gas prices (OGJ Online, Feb. 14, 2012). Chesapeake is the second largest US gas producer, after ExxonMobil Corp., the largest.

Chesapeake’s new loan

On May 11, Chesapeake announced a $3 billion loan from Goldman Sachs Group. Inc. and Jefferies Group Inc. to pay down a $4 billion credit facility of which Chesapeake has drawn more than $3 billion. The Goldman Sachs and Jefferies loan was increased to $4 billion, Chesapeake said May 15.

John Freeman, an analyst with Raymond James & Associates, said the loan, which has an initial interest rate of 8.5%, will give Chesapeake time to complete its planned asset sales.

“Chesapeake still plans to sell $9-11.5 billion of assets, including an outright sale of its Permian basin assets and a joint venture for its Mississippi Lime assets,” Freeman said. “This loan should provide Chesapeake added balance sheet cushion in order to receive more reasonable offers for its assets, thus preventing any fire sales."

Mississippi Lime assets are in Oklahoma and Kansas. Chesapeake anticipates that it will sell Permian basin assets in Texas by Sept. 30, McClendon said. He noted Chesapeake has several other assets it could sell.

The company owns 1.8 million net acres of leasehold in the Mississippi Lime and 1.5 million net acres of leasehold in the Permian basin. Chesapeake’s Permian acreage includes positions in the Bone Spring, Avalon, Wolfcamp, and Wolfberry plays.

McClendon said he expects “a major gas price recovery in 2013 and beyond.”

Analysts’ comments

Analyst Phil Weiss at Argus Research said the interest rate on the loan increases unless the loan is paid off this year. “To me, it’s really a big concern because they are spending about $200 million to borrow this money,” Weiss said when the $3 billion loan was announced.

Standard & Poor's Ratings Services on May 15 lowered Chesapeake’s credit rating to BB- from BB, leaving it three steps below investment grade. The outlook is negative.

S&P analyst Scott Sprinzen said, “The downgrade reflects mounting turmoil stemming from revelations that underscore shortcomings in Chesapeake's corporate governance practices, covenant concerns, and the likelihood Chesapeake will face an even wider gap between its operating cash flow and planned capital expenditures than we had previously anticipated.”

Previously, Chesapeake said it anticipates a significant decrease from the first-quarter's peak capital expenditure levels throughout the rest of 2012 and during 2013. The company plans to reduce drilling activity in dry natural gas plays and reduce spending on new leaseholds.

Meanwhile, Moody's Investors Service lowered its outlook on Chesapeake to negative from stable, saying recent operating results revealed a large capital spending funding gap for Chesapeake this year. Moody's maintained its credit rating for Chesapeake at Ba2.

On May 3, Chesapeake confirmed that the company and McClendon are the subjects of an informal inquiry by the US Securities and Exchange Commission. The SEC’s Fort Worth regional office requested Chesapeake and McClendon retain certain documents.

“The SEC noted…that its inquiry should not be construed as an indication that any violation of the federal securities laws has occurred,” Chesapeake said.

Contract Paula Dittrick at paulad@ogjonline.com.

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