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TEXT-Fitch revises Chesapeake outlook, affirms rtgs
April 26, 2012 / 1:55 PM / 6 years ago

TEXT-Fitch revises Chesapeake outlook, affirms rtgs

April 26 - Fitch Ratings has revised the Rating Outlook for Chesapeake
Energy Corporation's (Ticker: CHK) long-term Issuer Default Rating (IDR)
to Stable from Positive and affirmed all of the company's ratings. A full list
of rating actions follows at the end of this release. Chesapeake has 	
approximately $13 billion of rated securities.	
	
The Outlook revision results primarily from the near and intermediate term weak 	
outlook for natural gas prices in the U.S. coupled with Chesapeake's still 	
aggressive spending plans in 2012. The current weakness in natural gas prices 	
has accelerated since just a couple of months ago with the 12 month NYMEX strip 	
decreasing by nearly 20% to $2.63/Mcf over that timeframe. These price 	
expectations will reduce earnings and cash flow significantly from last year's 	
level. Current capex and leasehold spending are expected to total approximately 	
$8.5-$9 billion with spending in the company's other segments expected to be 	
$2.5-$3.5 billion. Current spending plans are expected to result in a funding 	
gap of $7-8.5 billion, which is to be funded with asset sales and monetizations 	
potentially totaling $10 billion. The asset sale/monetizations figure was 	
approximately 30% of total enterprise value as recently as a few weeks ago.	
	
Liquidity is provided by the company's $4 billion senior secured revolver due 	
2015. Additionally, Chesapeake Midstream Operating, LLC has a $600 million 	
senior secured revolver due 2016 that it can utilize, and Chesapeake Oilfield 	
Operating, LLC has a $500 million senior secured facility that it can utilize. 	
However, these latter two borrowing capacities are limited by certain 	
restrictive provisions. Nearer-term maturities for Chesapeake are $464 million 	
in 2013 and $1.6 billion in 2015. Key covenants are primarily associated with 	
the senior secured credit facility and include maximum debt-to-book 	
capitalization (70% covenant threshold) and maximum total debt-to-EBITDA (4.0x 	
covenant level). 	
	
Balance sheet debt totaled approximately $10.6 billion at the yearend 2011. In 	
addition, the company has in the past sold approximately $6 billion of reserves 	
into Volumetric Production Payments (VPPs) that Fitch considers to have 	
debt-like characteristics and factors into its analysis for adjusted leverage. 	
In addition, Chesapeake also has convertible preferreds and non-controlling 	
interests in its capital structure totaling approximately $4 billion as of 	
yearend 2011. 	
	
The recent news regarding the personal borrowings by the company's CEO from the 	
same group that has invested in preferred interests in two of Chesapeake's 	
non-guarantor subsidiaries has raised issues regarding the potential for a 	
conflict of interest and lack of transparency among some stakeholders. The 	
borrowings and the lack of prior disclosure has focused a spotlight on the 	
company's Board of Directors and its oversight of the company. Given this recent	
news, Fitch believes stakeholders will have a higher level of expectations for 	
disclosure and transparency going forward.	
	
Given the reduction in near-term price expectations for natural gas, there 	
exists a potential shortfall or delay in some of the expected proceeds from the 	
remaining planned asset sales and monetizations this year. As such, a 	
significant reduction in capital spending may be warranted for the Outlook to 	
remain Stable. That said, Chesapeake has already completed or will complete soon	
approximately 25% of this year's $10 billion in planned assets 	
sales/monetizations and has a proven track record of successfully monetizing 	
assets in the past.	
	
Fitch has affirmed the ratings for Chesapeake as follows:	
	
--IDR at 'BB'; 	
--Senior unsecured debt at 'BB'; 	
--Senior secured revolving credit facility at 'BBB-';	
--Convertible preferred stock at 'B+'. 	
The Rating Outlook is revised to Stable from Positive.

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