Analysis: Sharks circle McClendon's Chesapeake
HOUSTON/NEW YORK (Reuters) - Chesapeake Energy Corp's increasing shift from bank loans to costly funding is raising fresh questions about how long the spigot of cash will remain open and whether the company can sell enough assets quickly enough to pay for day-to-day operations.
The company's problems were brought into sharp focus Monday when CEO Aubrey McClendon, who has a reputation for scrambling to close financing deals, told skeptical stock and bond holders how his company will use a loan from Jefferies & Co. and Goldman Sachs to pay down a $4 billion loan commitment from banks.
While McClendon expressed confidence Chesapeake can find buyers for assets, the $3 billion loan announced on Friday evening was a sign that potential bidders were taking advantage of the company's weakening liquidity and offering low-ball bids for assets.
"The way I look at is, I know they have some desirable assets," Phil Weiss, analyst at Argus Research, said. "At some point, doesn't the buyer on the other side of the table say 'this company is in trouble, I'm going to hold out for better?'"
The company's shares fell nearly 14 percent on Friday after Chesapeake said in a quarterly filing it would delay or cancel a production deal on oil-rich acreage in South Texas, a transaction that would have brought in $1 billion for the cash-starved company.
Seeking to reassure investors, the Oklahoma City, Oklahoma company said on Monday it is on track to close deals that will bring up to $11.5 billion this year, funds that are essential to closing a gap of around $9 billion. Shares closed up nearly 5 percent on Monday, but are down over 30 percent for the year.
While the loan provides some short-term relief, worries remain. Bond investors are nervous not only about future asset sales, which are effectively required by the new loan, but also about other new loans that may become secured ahead of the bonds, according to Alexander Diaz-Matos of New York credit-research firm Covenant Review LLC.
"I see this term loan today and I worry what is the next step," said Diaz-Matos, a lawyer and expert in bond covenants. "The loan has a blanket protection against future secured debt," Diaz-Matos said, noting that is the "top-line concern" for bond investors, "who don't have meaningful protection against secured loans."
"After reviewing Friday's 10-Q, we believe the company's financial footing has further deteriorated," Sterne Agee analyst Tim Rezvan told his clients on Monday, noting the 5-year loan's pricey 8.75 percent interest rate signaled desperation for cash.
Trading in Chesapeake debt securities was active with bonds maturing in 2020 being quoted around 91.50 cents and 92.50 cents on the dollar. On Friday, those bonds closed at 93.50 cents on the dollar, but not before starting the day around 97 cents on the dollar.
Investors increasingly are betting that Chesapeake's stock will fall. Those investors, known as short sellers, seek to profit when they borrow shares and then sell them in the hope of buying them back at a lower price for a profit.
The percentage of shares outstanding on loan, which indicates the shares are being loaned to short sellers, has risen to 12.5 percent of shares outstanding from 3.3 percent at the beginning of the year, according to Markit Group.
Another indicator is the cost of insuring Chesapeake's debt against potential default, which rose to its highest level in more than a year. Five-year credit default swaps widened by 52 basis points to about 804 basis points. That means it costs $804,000 a year for five years to insure $10 million of debt.
CDS prices have climbed more than 45 percent in the past 50 days, signaling sharply rising concerns about the company's ability to service its debt.
Still, some noted McClendon's past fund-raising prowess. "About the only thing you can say about Aubrey is he really knows how to raise money," Mike Breard, oil analyst with Hodges Capital in Dallas, said.
Chesapeake's recent misfortunes, which include Reuters' revelation that McClendon has arranged to borrow more than $1 billion against well interests granted to him as a company perk and resulting regulatory probes, may give buyers an upper hand, analysts and investment bankers said.
The company's major asset currently on the market is its 1.5 million acres of lease holdings in the oil-rich Permian basin, which has become one of the hottest exploration regions in North America in recent years.
It has also said it plans to find a joint venture partner in another liquids-rich region, the Mississippi Lime basin. It said it expects to close both deals in the third quarter.
"All of the divestitures are at risk," said one investment banker who spoke on the condition of anonymity. "They're all challenged. If you're a buyer and you smell blood would you give full value?"
McClendon said in a conference call on Monday that the company opened its data room for the Permian basin acreage last week, and three possible buyers have already looked at the information. He said more than 10 companies have expressed interest in the assets.
Acreage in the Permian basin has become highly sought after in recent years, with deals bringing in as much as $17,000 an acre (0.4 hectare) for assets believed to be particularly oil heavy.
While Chesapeake has one of the largest land positions in the basin, bankers said some buyers were worried that the company's lease holdings in the region are too gas heavy and spread out to fetch premium prices.
Chesapeake is hoping to bring in around $5 billion from the sale, according to two investment bankers working in the industry. But bankers said the company may have trouble reaching that number.
"It's the most attractive asset on the face of it, and people are looking at it and saying, 'We're not sure how good it is, we're not sure if we're really interested,'" another banker said. "It will be a reasonable process. This is a core area for a lot of people. But if I were a buyer I'd be looking at it and saying this is a seller who needs to sell."
Companies have not yet submitted bids for the assets. Still, given the price tag and that buyers may have to invest new capital in the properties to keep developing them, bids are likely to come from only large oil and gas companies, like Occidental Petroleum, Apache Corp and Marathon Oil.
Chesapeake has about 2 million acres in the Mississippi Line, a formation in northern Oklahoma and Kansas that contains natural gas and oil.
One challenge facing Chesapeake's Mississippi Lime JV has been that some of its previous partnerships -- especially in so-called dry gas regions -- have turned sour.
For instance, Chesapeake signed a deal to sell 25 percent of its Fayetteville shale acreage to BP Plc in 2008. While Chesapeake later sold out of its side in the partnership, BP took a $393 million write down on the value of the assets in 2011.
"It's been a pretty unsuccessful adventure for guys," one investment banker said. "It accrues more value for Chesapeake than for its partners, so a lot of guys are reluctant to go into a JV with him."
(Additional reporting by Michael Erman; Editing by Patricia Kranz and Leslie Gevirtz)
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