Bloomberg News

Chesapeake Eyes $12 Billion in Asset Sales Amid Cash Squeeze

February 15, 2012

(Updates with Moody’s action in 20th paragraph.)

Feb. 13 (Bloomberg) -- Chesapeake Energy Corp., the second- biggest U.S. natural-gas producer, is seeking as much as $12 billion from assets sales and joint ventures to cope with a cash crunch amid rising debt and tumbling gas prices.

The company expects to get $10 billion to $12 billion from transactions including the potential sale of all its oil and gas fields in the Permian Basin of Texas and New Mexico, Chesapeake said in a statement today. The Oklahoma City-based company expects to receive about $2 billion in the next 60 days from two separate transactions involving advance sales of output in Texas and Oklahoma.

The deals will help Chesapeake reduce a net debt load that is twice the size of Exxon Mobil Corp.’s, a company with a market value 27 times larger. Chairman and Chief Executive Officer Aubrey McClendon is facing a $3.5 billion gap this year between cash flow and drilling costs, according to Raymond James & Associates Inc. McClendon, who has been seeking an investment- grade rating since at least 2009, has vowed to cut long-term debt 25 percent by year end.

“This is exactly what Chesapeake had to do given the pretty big cash flow-to-spending gap they are facing,” Kevin Cabla, an analyst at Raymond James in Houston, said today in a telephone interview. Selling more shares to bridge the financing gap “would have crushed the stock even more than it has been.”

28 Percent Decline

Chesapeake rose 2.4 percent to $22.66 at the close in New York. Before today, the stock had lost 28 percent of its value in the past year.

Chesapeake and rival explorers such as ConocoPhillips have been curtailing gas production after an expanding glut of North American supplies drove prices to the lowest in a decade last month. Chesapeake is sensitive to falling gas prices, with every 25-cent decline reducing the company’s cash flow by 5.4 percent, Brian Gibbons, a credit analyst at CreditSights, said in a Feb. 7 note to clients.

Chesapeake’s capital spending has exceeded cash from operations in every quarter since October 2003, according to data compiled by Bloomberg. During the third quarter of 2011, as U.S. gas futures were tumbling 16 percent, Chesapeake swelled its net debt by 18 percent to $11.678 billion.

Gas Price Pressure

“This move is clearly in response to pressures exerted by weak natural-gas prices, its high leverage and high spending plans,” Scott Hanold, a Minneapolis-based analyst for RBC Capital Markets, wrote today in a note to clients. Hanold estimates a $4 billion funding gap for 2012.

Gas dipped to a 10-year low of $2.231 per million British thermal units on Jan. 23. Gas for March delivery fell 1.9 percent to settle at $2.431 per million British thermal units in New York, a 38 percent drop in a year.

The company said its 2012 financial plan will “fully fund” its planned spending for the year and provide additional liquidity for next year.

In the next two months, Chesapeake will receive an up-front payment for future production in the Texas Granite Wash formation. Chesapeake didn’t say who the buyer would be.

The company also plans to sell stakes in a new subsidiary that will hold assets in the Cleveland and Tonkawa deposits in Oklahoma. The transaction would be “similar” to an agreement announced in November when private investors bought shares in a Chesapeake subsidiary that holds Utica Shale acreage.

Hottest Regions

Later in the year, Chesapeake may raise as much as $8 billion from transactions in the Mississippi Lime and Permian Basin, where it’s seeking joint-venture partners, the company said. Chesapeake holds the rights to drill on 1.8 million net acres in the Mississippi Lime, which spans northern Oklahoma and southern Kansas.

For the Permian Basin, where Chesapeake holds 1.5 million net acres, the company said it may consider selling all of the assets “if it receives a compelling offer.”

Chesapeake ought to fetch top dollar for its Permian assets because they are about 80 percent oil at a time when crude is averaging $100 a barrel, Cabla said.

“With oil prices at these levels, this is probably the best time to be getting out of the Permian,” Cabla said. “The Permian is one of the hottest regions right now” for acquisitions.

Previous Permian Exit

In September 2002, McClendon said the company would exit the Permian, drilling instead in lower-cost fields in the Midwest. Fifteen months later, Chesapeake changed course with a $420 million acquisition including wells in the Permian from closely held Concho Resources Inc.

Chesapeake plans to raise another $2 billion selling pipelines and gas-processing plants, oilfield-services operations and miscellaneous investments, according to the statement.

Separately, Chesapeake said it will sell $1 billion of senior notes due in 2019 and use the proceeds to repay bank credit.

Moody’s Investors Service cut its outlook for Chesapeake’s corporate rating today to stable from positive, citing lower gas prices and rising debt. The new offering was rated Ba3, three levels below investment grade and a level lower than Chesapeake’s corporate credit.

Moody’s considers up-front gas-production payments as debt and probably will treat most, if not all, preferred shares sold by subsidiaries as debt as well, according to the statement. The combination of debt and asset sales planned this quarter may raise the company’s debt by $3 billion, Moody’s said.

Exxon Mobil, based in Irving, Texas, is the largest U.S. gas producer.

--Editors: Tina Davis, Steven Frank

To contact the reporters on this story: Jim Polson in New York at jpolson@bloomberg.net; Joe Carroll in Chicago at jcarroll8@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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