Chesapeake Energy Corp. (CHK) must sell at least $7 billion in assets this year to avoid a credit downgrade and a breach of debt covenants, Moody’s Investors Service said.
The company, which took out a $4 billion loan this month to help fill a cash-flow shortfall, may exceed debt restrictions in the second half of the year, a group of Moody’s analysts led by Peter Speer wrote in a report e-mailed today. The company’s revolving credit facility covenants limit debt to four times earnings before interest, taxes, depreciation and amortization, according to the report.
Chesapeake is in the midst of a cash crunch after Chief Executive Officer Aubrey McClendon allowed hedging contracts to expire in late 2011, leaving the Oklahoma City-based company exposed when natural-gas prices slumped to a 10-year low last month. The company, the largest U.S. gas producer after Exxon Mobil Corp., has said it plans to sell as much as $14 billion in assets this year.
“Even $7 billion in asset sales could place Chesapeake’s covenant compliance for its revolving credit facility in some doubt, and the company would still face a significant funding gap in 2013,” Speer wrote. “Asset sales much below $7 billion, meanwhile, would likely lead to a downgrade.”
The company’s debt is rated Ba2 by Moody’s with a negative outlook.
Chesapeake told investors on May 11 that some of the planned 2012 asset sales might be postponed to retain cash flow necessary to comply with bank covenants.
Selling Texas Assets
Three days later, the company canceled plans to raise as much as $1 billion by selling future production from oil wells in the Eagle Ford Shale in south Texas. Chesapeake also indefinitely delayed an initial share sale for its oilfield- services unit, citing “market conditions.”
McClendon, 52, plans to sell oil and gas assets in Texas, Oklahoma, Kansas and other states to plug a cash shortfall that James Sullivan, an analyst with Alembic Global Advisors, estimated may exceed $15 billion this year and $7 billion in 2013.
The company’s 1.5 million net acres in Texas’ Permian Basin may attract several bidders and are worth $4 billion to $6 billion, Moody’s said.
Chesapeake rose 2.8 percent to $16.90 at the close in New York. The shares have declined 24 percent this year as a glut of North American gas collapsed prices for the fuel and McClendon’s finances spurred internal and external probes. McClendon, who is being stripped of his role as chairman, took personal loans from companies that were also involved in financial transactions with Chesapeake.
McClendon faces shareholders on June 8 when the company convenes its annual meeting in Oklahoma City. Billionaire investor Carl Icahn announced last week that he acquired a 7.56 percent stake and wants four of the nine board members replaced.
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