S&P Upgrades Chesapeake Energy (CHK) Credit Rating to 'CCC+' from 'SD'; Negative Outlook
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S&P Global Ratings said today that it raised its corporate credit rating on Oklahoma City-based exploration and production company Chesapeake Energy Corp. (NYSE: CHK) to 'CCC+' from 'SD' (selective default). The rating outlook is negative.
At the same time, we assigned our 'CCC-' issue-level rating and '6' recovery rating to the company's proposed $850 million convertible notes due 2026. The '6' recovery rating indicates our expectation for negligible (0%-10%) recovery of principal in the event of a payment default.
We also raised our issue-level ratings on the company's $4 billion first-lien credit facility and $1.5 billion first-lien second-out term loan to 'B' from 'B-', and removed the ratings from CreditWatch, where we had placed them with positive implications on Aug. 19, 2016. The recovery ratings remain '1', indicating our expectation for very high (90%-100%) recovery of principal in the event of a payment default.
Additionally, we raised our issue-level rating on the company's $2.425 billion second-lien notes to 'B' from 'CCC+' and removed it from CreditWatch positive. We also revised the recovery rating to '1' from '2', indicating our expectation for very high recovery (90%-100%) of principal in the event of a payment default.
We also raised our issue-level ratings on the company's euro-denominated notes due 2017 and contingent convertible notes due 2035 to 'CCC-' from 'CC' and removed them from CreditWatch positive. The recovery ratings remain '6', indicating our expectation for negligible (0%-10%) recovery of principal in the event of a payment default.
Our 'D' issue-level ratings on Chesapeake's senior unsecured debt and preferred stock are not affected.
"The upgrade of Chesapeake to 'CCC+', which is one notch above the 'CCC' pre-tender corporate credit rating, reflects the company's improving liquidity and our expectation that its credit measures will strengthen over the next 12-18 months. Chesapeake has successfully executed several transactions in 2016 to improve both its liquidity and financial performance," said S&P Global Ratings' credit analyst Paul Harvey. Notably these transactions include the company's conveyance of its Barnett Shale assets to Total S.A., which should raise estimated cash flows by $200 million to $300 million annually through 2019; reduce estimated gathering, processing, and transportation costs by about $715 million through 2017, including eliminating related minimum volume commitments of about $170 million for the remainder of 2016 and $230 million in 2017; and increase the PV-10 value of the company's reserves by an estimated $550 million.
"The negative rating outlook reflects Chesapeake's still-high debt leverage and our expectation for significant negative free cash flow, and a heavy, albeit much improved, debt maturity schedule through 2019," said Mr. Harvey. "We believe the significant improvements Chesapeake made to its liquidity in 2016 could erode if the company fails to support expected negative cash flows through further asset sales." The company has forecast asset sales of up to $1 billion--in addition to divestitures already announced year-to-date.
We could lower the corporate credit rating if Chesapeake's liquidity deteriorated. This would likely occur if additional sources of liquidity are not found to support 2018 expected capital spending, debt maturities, and puts.
We could revise the outlook to stable or raise the rating if Chesapeake can continue to improve its liquidity such that it has a clear path to addressing its heavy debt maturity schedule, while continuing to improve debt leverage. This would likely occur in conjunction with improving natural gas and crude oil prices as well as material asset sales, including estimated asset sales of about $1 billion over the next six to 12 months.
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