FTS Downgraded on Chesapeake's Drilling Cutback Plan

Chesapeake Energy Corp.’s plan to reduce drilling next year to cope with a cash crunch contributed to Standard & Poor’s Ratings Services credit downgrade of a hydraulic-fracturing company it partially owns.

S&P lowered its ratings on FTS International Services LLC’s corporate credit and term loans to B from B+ and senior unsecured debt to BB- from BB. The BB- rating is three levels below investment-grade and B is two notches below that.

FTS’s profit outlook has dimmed amid rising costs and capacity additions across the so-called fracking industry that are outpacing demand growth, Carin Dehne-Kiley, a New York-based S&P analyst, wrote in a note to clients today.

Chesapeake, the second-largest U.S. natural-gas producer after Exxon Mobil Corp., accounts for about a quarter of Fort Worth, Texas-based FTS’s contracted revenue for 2012, Dehne-Kiley wrote. Facing a $22 billion cash shortfall this year and next because of tumbling gas prices, Chesapeake has proposed cutting spending on drilling, fracking and other project costs.

FTS’s 7.125 percent bonds due in November 2018 quoted at 99.6 cents on the dollar to yield 8.2 percent today, according to data compiled by Bloomberg. They were quoted at par as recently as May 17 to yield 8.124 percent.

Liquidity Questions

“We view FTS’s liquidity as less than adequate,” Dehne-Kiley wrote. “Chesapeake has indicated publicly that it plans to reduce drilling capital by over $1 billion (13%) between 2012 and 2013, so its fracking needs are likely to drop.”

Fracking involves pumping high-pressure jets of water, sand and chemicals into wells to smash fissures into the surrounding rocks so oil and gas can flow. Chesapeake, one of the pioneers in the use of fracking to tap geologic formations impervious to traditional drilling methods, is part owner of FTS and controls two board seats.

Dehne-Kiley said she expects FTS’s ratio of debt to earnings before interest, taxes, depreciation and amortization to rise to 4.3 by the end of this year and 6 in late 2013 from 2.3 at the end of 2011. S&P would revise its outlook to stable if FTS reduces debt through a cash infusion from a “strategic investor” and an initial share sale.

FTS is led by Chief Executive Officer Marcus Rowland, one of the first investors in Chesapeake when it was co-founded by Aubrey McClendon and Tom Ward in 1989. Rowland was Chesapeake’s chief financial officer for 18 years before stepping down in 2010. McClendon and Chesapeake CFO Domenic Dell’Osso are FTS directors.

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