Fitch Revises Chesapeake (CHK) Long-Term IDR to Stable

April 26, 2012 10:17 AM EDT
Fitch Ratings has revised the Rating Outlook for Chesapeake Energy Corporation's (NYSE: CHK) long-term Issuer Default Rating (IDR) to Stable from Positive and affirmed all of the company's ratings. A full list of rating actions follows at the end of this release. Chesapeake has approximately $13 billion of rated securities.

The Outlook revision results primarily from the near and intermediate term weak outlook for natural gas prices in the U.S. coupled with Chesapeake's still aggressive spending plans in 2012. The current weakness in natural gas prices has accelerated since just a couple of months ago with the 12 month NYMEX strip decreasing by nearly 20% to $2.63/Mcf over that timeframe. These price expectations will reduce earnings and cash flow significantly from last year's level. Current capex and leasehold spending are expected to total approximately $8.5-$9 billion with spending in the company's other segments expected to be $2.5-$3.5 billion. Current spending plans are expected to result in a funding gap of $7-8.5 billion, which is to be funded with asset sales and monetizations potentially totaling $10 billion. The asset sale/monetizations figure was approximately 30% of total enterprise value as recently as a few weeks ago.

Liquidity is provided by the company's $4 billion senior secured revolver due 2015. Additionally, Chesapeake Midstream Operating, LLC has a $600 million senior secured revolver due 2016 that it can utilize, and Chesapeake Oilfield Operating, LLC has a $500 million senior secured facility that it can utilize. However, these latter two borrowing capacities are limited by certain restrictive provisions. Nearer-term maturities for Chesapeake are $464 million in 2013 and $1.6 billion in 2015. Key covenants are primarily associated with the senior secured credit facility and include maximum debt-to-book capitalization (70% covenant threshold) and maximum total debt-to-EBITDA (4.0x covenant level).

Balance sheet debt totaled approximately $10.6 billion at the yearend 2011. In addition, the company has in the past sold approximately $6 billion of reserves into Volumetric Production Payments (VPPs) that Fitch considers to have debt-like characteristics and factors into its analysis for adjusted leverage. In addition, Chesapeake also has convertible preferreds and non-controlling interests in its capital structure totaling approximately $4 billion as of yearend 2011.

The recent news regarding the personal borrowings by the company's CEO from the same group that has invested in preferred interests in two of Chesapeake's non-guarantor subsidiaries has raised issues regarding the potential for a conflict of interest and lack of transparency among some stakeholders. The borrowings and the lack of prior disclosure has focused a spotlight on the company's Board of Directors and its oversight of the company. Given this recent news, Fitch believes stakeholders will have a higher level of expectations for disclosure and transparency going forward.

Given the reduction in near-term price expectations for natural gas, there exists a potential shortfall or delay in some of the expected proceeds from the remaining planned asset sales and monetizations this year. As such, a significant reduction in capital spending may be warranted for the Outlook to remain Stable. That said, Chesapeake has already completed or will complete soon approximately 25% of this year's $10 billion in planned assets sales/monetizations and has a proven track record of successfully monetizing assets in the past.

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