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Chesapeake May Delay Asset Sales on Loan Agreements

Chesapeake May Delay Asset Sales to Maintain Compliance on Loan
A natural gas drilling rig stands on a Chesapeake Energy Corp. drill site in Bradford County, Pennsylvania. Photographer: Daniel Acker

Chesapeake Energy Corp. may delay billions of dollars in asset sales this year because the transactions could hurt its ability to comply with loan agreements.

Chesapeake Chief Executive Officer Aubrey McClendon plans to plug a funding gap that Fitch Ratings estimated may reach $10 billion this year by selling oilfields and future production from some wells, and negotiating joint-venture agreements. The company will borrow $3 billion from Goldman Sachs Group Inc. and Jefferies Group Inc. to tide it over until the sales are completed, according to an e-mailed statement yesterday.

A 40 percent drop in U.S. natural-gas prices in the past year because of a supply glut prompted Chesapeake and other explorers to curb gas drilling and focus on higher-profit oil production. With more than three-quarters of its output still comprised of gas, Chesapeake’s ability to comply with the covenants of its $4 billion revolving bank credit facility may be reduced if the company sells too many assets, according to a regulatory filing yesterday.

“While asset monetizations enhance our liquidity, sales of producing natural gas and oil properties adversely affect the amount of cash flow we generate and reduce the amount and value of collateral available to secure our obligations, both of which are exacerbated by low natural gas prices,” the Oklahoma City-based company said in the filing.

Plans Not Changed

The company has no plans to change its “asset-monetization goals,” Michael Kehs, Chesapeake’s vice president for strategic planning, said in a telephone interview yesterday.

Chesapeake fell 14 percent to $14.81 yesterday in New York to the lowest since March 2009. Chesapeake shares have fallen 26 percent in the past four weeks amid concern that private loans McClendon obtained using personal stakes in company wells conflict with his professional duties.

Chesapeake’s 6.775 percent notes maturing in March 2019 fell 5.5 cents on the dollar to 93 cents yesterday, lifting the yield to 8.125 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Credit-default swaps on Chesapeake climbed 3.35 percentage points to 9.25 percent upfront yesterday, according to CMA, which is owned by CME Group Inc. The cost of the company’s contracts means buyers of protection would pay $925,000 initially and $500,000 annually to protect $10 million of debt from default for five years.

SEC Inquiry

The board said May 1 that it will strip McClendon of the chairman’s post and is conducting an internal review of his personal transactions. The SEC opened an informal inquiry earlier this month, the company has said.

Chesapeake said yesterday that it will repay the $3 billion short-term loan from Goldman and Jefferies with proceeds from as much as $11.5 billion in asset sales it plans for the remainder of this year.

The company said it had received “strong interest” in its Permian Basin assets in Texas and New Mexico, and from potential partners in a joint-venture for its Mississippi Lime project in Oklahoma and Kansas. Chesapeake expects to complete those transactions in the third quarter.

“This short-term loan from Goldman and Jefferies provides us with significant additional financial flexibility as we execute our asset sales during the remainder of 2012,” McClendon said in yesterday’s statement.

The $3 billion loan from Jefferies affiliates and Goldman Sachs Bank USA matures on Dec. 2, 2017 and has an initial variable annual interest rate of 8.5 percent.

Drilling Carry

Chesapeake has already burned through more than three-fourths of joint-venture proceeds amassed since July 2008 to defray drilling costs, according to yesterday’s filing. The company spent 79 percent of the $9.04 billion of so-called drilling carry, or development expenses paid by partners, in its seven joint-venture agreements, according to the filing.

About $1.37 billion, or 97 percent, remains in Total SA’s commitment to pay Chesapeake’s drilling costs in Ohio’s Utica Shale, according to the filing. Cnooc Ltd., China’s largest offshore energy producer, has $544 million, or 78 percent, left to pay on its commitment in the Niobrara Shale in the Rockies region. Money supplied by partners in the other five deals has been exhausted, according to the filing.

Chesapeake, co-founded by McClendon in 1989, has outspent cash flow in 19 of the past 21 years, according to data compiled by Bloomberg.

The company, which pumps more U.S. gas than any company except Exxon Mobil Corp., posted an unexpected $71 million first-quarter loss on May 1, warned it may run out of money next year and increased planned asset sales through the end of 2013 by 17 percent to $20.5 billion.

The company’s 2.03 price-to-cash flow ratio is the lowest among its peers and less than one-third the average for the group, according to data compiled by Bloomberg. The stock has 16 buy ratings from analysts, 18 holds and three sell recommendations.

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