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Chesapeake Takes Texas Oil Sale Off Table to Keep Cash

Chesapeake Energy Corp. (CHK), the worst-performing U.S. oil and natural-gas stock this year, postponed a sale of future production from Texas oilfields and the spinoff of its drilling subsidiary as slumping prices worsened a cash crunch.

The company canceled plans to raise as much as $1 billion this year through a so-called volumetric production payment from its Eagle Ford wells in south Texas, Chief Executive Officer Aubrey McClendon said during a conference call with analysts today. An initial public offering for Chesapeake’s oilfield-services unit also is on hold until at least next year, he said.

The company, facing a cash-flow shortfall that Fitch Ratings estimates will reach $10 billion this year, will keep the Eagle Ford wells as it seeks to meet terms of a $4 billion revolving credit facility. Chesapeake will sell other assets to raise cash this year, McClendon said. The drilling IPO is on hold because of “market conditions,” he said.

“We just thought directionally, given the drop in oil prices and given where our cash flow is this year, it’s better to hang on to that for the time being,” Domenic Dell’Osso, chief financial officer of Oklahoma City-based Chesapeake, said of the Eagle Ford assets on the call.

Photographer: Daniel Acker/Bloomberg

Chesapeake told investors on May 11 that it may be forced to postpone oilfield sales and joint-venture agreements to conserve cash flow needed to comply with bank covenants. Close

Chesapeake told investors on May 11 that it may be forced to postpone oilfield sales... Read More

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Photographer: Daniel Acker/Bloomberg

Chesapeake told investors on May 11 that it may be forced to postpone oilfield sales and joint-venture agreements to conserve cash flow needed to comply with bank covenants.

Goldman Loan

Chesapeake, the largest U.S. gas producer after Exxon Mobil Corp., said on May 11 it will borrow $3 billion from Goldman Sachs Group Inc. (GS) and Jefferies Group Inc. to tide it over until it can find buyers for assets and partners to help cover drilling costs. McClendon said the banks loaning the money are also advising it on asset sales “so it should give you a pretty good look into what their assessment of the market is.”

Chesapeake rose 4.8 percent to $15.52 at the close in New York, the biggest increase in two weeks. Chesapeake has declined 30 percent this year, the worst performance by an oil and gas producer on the Standard & Poor’s 500 Index.

Chesapeake plans to repay the new loan by the end of the year with proceeds from the sale of oilfields in Texas’ Permian Basin and a joint venture to develop the Mississippi Lime formation that straddles the Oklahoma-Kansas border, Dell’Osso said today.

Icahn Stake?

McClendon said he “wouldn’t be surprised” if activist investor Carl Icahn became a large shareholder in Chesapeake again. McClendon has a good relationship with Icahn, who he said made more than $500 million after he took a stake in the company in 2010.

Photographer: F. Carter Smith/Bloomberg

Chesapeake Energy Corp. Chief Executive Officer Aubrey McClendon. Close

Chesapeake Energy Corp. Chief Executive Officer Aubrey McClendon.

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Photographer: F. Carter Smith/Bloomberg

Chesapeake Energy Corp. Chief Executive Officer Aubrey McClendon.

Chesapeake said in a May 11 regulatory filing that some asset sales may be delayed to maintain production and cash flow required to comply with bank covenants.

“Poorly executed sales may have a negative effect on Chesapeake’s stock price,” James Sullivan, an analyst at Alembic Global Advisors in New York who has a neutral rating on Chesapeake, said in a note to clients today. “In the event of further commodity price declines and insufficient asset sales, Chesapeake may find itself unable to borrow further to fund its drilling program.”

Chesapeake has lost 22 percent of its market value in the past four weeks amid concern that private loans McClendon obtained using his personal stakes in company wells as collateral conflict with his professional duties.

The board said May 1 it will strip McClendon of the chairman’s position and an internal review of his personal transactions is under way. The U.S. Securities and Exchange Commission opened an informal inquiry earlier this month.

Cash-Flow Shortfall

The company’s cash flow will fall $10 billion short of planned spending on new wells and leases, Fitch said in a May 4 note to clients. Chesapeake posted an unexpected $71 million first-quarter loss and said on May 1 that it may run out of money next year to fund its drilling program. The shares tumbled 15 percent last week for the biggest weekly decline since September.

U.S. gas prices have plunged 43 percent in the past year as new production from shale formations glutted North American markets. The surfeit expanded as mild winter weather across the northern U.S. stifled demand for gas to run furnaces, said Ben Smith, president of First Enercast Financial, a Denver-based gas broker.

Gas futures traded on the New York Mercantile Exchange touched a 10-year low of $1.902 per million British thermal units on on April 19 and are down 19 percent this year. Prices for June delivery fell 3.1 percent to settled at $2.431 today.

Chesapeake outspent its cash flow in 19 of the past 21 years as it amassed drilling rights from the Gulf Coast to the Appalachians.

To contact the reporter on this story: 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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