Chesapeake Delays Asset Sales After Reporting Loss

Chesapeake Energy Corp. (CHK), the U.S. energy producer that wrote down $2 billion in natural gas reserves yesterday, said some asset sales may be delayed as it seeks new buyers. The shares fell the most in four months.

Sales of gas fields and other assets that had been scheduled to occur this year won’t happen until 2013, Chief Financial Officer Nick Dell’Osso said on an earnings conference call today. Among the delayed items is Chesapeake’s 2 million acres in the Mississippi Lime, an Oklahoma and Kansas shale formation that holds crude and gas.

Chesapeake is no longer courting Asian investors for a joint venture in the Mississippi Lime formation, partly because of concerns about rising political opposition to foreign investment in domestic energy resources, Chief Executive Officer Aubrey McClendon said on the call. McClendon said he’s now in discussions with oil industry players about buying some or all of the company’s drilling rights.

“We have continued reservations about the company’s liquidity,” James Sullivan, an analyst at Alembic Global Advisors in New York, said in a note to clients today. Asset sales are proceeding slowly and those that have been completed “fail to impress.”

Chesapeake, based in Oklahoma City, is seeking to sell as much as $19 billion in assets by the end of 2013 to plug a funding shortfall aggravated by the plunge in U.S. gas prices. A 29 percent slide in fuel prices during the third quarter compared with a year earlier wiped out the equivalent of 4.9 trillion cubic feet of Chesapeake’s reserves, according to a company statement yesterday. That’s enough to supply every household in the U.S. for more than a year.

Asset Writedowns

Energy explorers from Australia’s BHP Billiton Ltd. (BHP) and Canada’s Encana Corp. (ECA) began writing down the value of North American gas properties earlier this year as the price slump worsened and many fields became unprofitable to drill.

Concern about Asian buyers comes after the Canadian government last month rejected a bid by Malaysian oil company Petroliam Nasional Bhd. to buy Progress Energy Resources Corp. (PRQ)

Chesapeake reported a net loss of $2.01 billion, or $3.19 a share, compared with profit of $922 million, or $1.23, a year earlier, according to the statement yesterday. The shares fell 7.9 percent to $18.49 at the close in New York, the biggest decline since June 25 and the worst performance among the 43 companies on the Standard & Poor’s 500 Energy Index. (S5ENRS)

Cash Flow

“Chesapeake looks like it’s probably done with write-offs for now,” Philip Weiss, an analyst at Argus Research in New York, said in a phone interview yesterday. “Eventually, they’ll be able to put those resources back on the books, when prices recover and they become economical” to drill.

The company said last month it will have $2.3 billion in surplus cash flow when 2012 ends, an about-face from its May 1 warning to investors that it was in danger of running out of cash as early as 2013.

Gas output climbed 25 percent to the equivalent of 3.81 billion cubic feet a day during the quarter, even as McClendon shifted the company’s drilling focus to production of oil and byproducts such as butane that command higher prices. The company also raised the 2012 drilling budget yesterday to $8.75 billion, an increase of as much as 9.4 percent from the $8 billion to $8.5 billion estimate announced last month.

Net Loss

The net loss was the company’s biggest since the first three months of 2009, when Chesapeake wrote down the value of some reserves in response to the worldwide financial crisis and reduced energy demand.

Gas futures traded in New York tumbled to an average of $2.893 per million British thermal units for the July-to- September period as increasing demand for the fuel failed to erode a growing surplus from U.S. shale wells.

U.S. production of so-called dry gas, or gas without liquid byproducts, rose 4.1 percent in July to 2.02 trillion cubic feet, the most ever for that month of the year, Energy Department figures showed.

Also yesterday, Chesapeake announced plans to borrow $2 billion under a five-year term loan.

The debt will pay interest around 4.5 percentage points more than the London interbank offered rate, according to a person with knowledge of the deal. Libor, a rate banks say they can borrow in dollars from each other, will have a 1.25 percent floor, said the person, who asked not to be identified because the information is private.

Loan Proceeds

The company is proposing to sell the loan at 99 cents on the dollar, the person said, reducing proceeds for the company and boosting the yield to investors.

Proceeds will be used to refinance a credit pact Chesapeake got in May that pays a higher interest rate, the company said in a regulatory filing. Bank of America Corp., Goldman Sachs Group Inc. (GS) and Jefferies Group Inc. (JEF) arranged the loan.

Excluding one-time items such as the writedown, Chesapeake earned 10 cents a share during the third quarter, a penny more than the average of 34 analysts’ estimates compiled by Bloomberg.

Chesapeake lost 17 percent of its market value this year as the impact of falling gas prices was compounded by disclosures that McClendon borrowed more than $800 million last year to finance his personal stakes in thousands of company-owned oil and gas wells.

Chairman Role

McClendon was removed from the chairman’s role in June and more than half the board was replaced at the insistence of Chesapeake’s largest investors, Southeastern Asset Management Inc. and Carl Icahn.

The board has been conducting an internal investigation for more than six months of McClendon’s borrowings from some of the company’s biggest financiers. Chesapeake hasn’t said when the board will finish the inquiry. Probes also are under way at the Internal Revenue Service and the U.S. Securities and Exchange Commission.

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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