Chesapeake Energy Corporation (NYSE:CHK)’s $2 billion unsecured term loan due of 2017 was rated BB- by Fitch Ratings, one of the major ratings agencies worldwide. According to Fitch, the rating outlook for the second largest natural gas producer in the United States remained negative.
Chesapeake Energy Corporation (NYSE:CHK) plans to use the net proceeds of the term loan to repay the remaining balance of the company’s $4 billion term loan, and to reduce its $4 billion outstanding debts under the company’s revolving credit facility due on 2015.
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According to the company, the current term loan will enhance its liquidity and financial flexibility as the company strives to complete its asset divestitures until the early part of 2013.
Chesapeake Energy Corporation (NYSE:CHK) previously announced the delay of certain assets sales transactions, including the Mississippi Lime and the Oklahoma and Kansas shale formations, due to increasing political concerns over foreign investments in the country’s energy resources. The company stopped seeking investors from Asian companies and re-evaluated its selling strategy. Chesapeake CEO Aubrey McClendon said the company is in talks with a number of the oil industry players to buy its drilling rights.
According to Fitch Ratings, the BB- rating for Chesapeake’s $2 billion unsecured term loan reflects the company’s leverage relative to reserves and production, which is rather offset by the sheer of its asset base and operating profile. The negative outlook reflects the problems related to funding faced by the company amid weak natural gas pricing environment.
Fitch Ratings cited that Chesapeake Energy Corporation (NYSE:CHK)’s balance sheet debt during the September quarter was more than $16 billion, compared with its $11 billion estimated debt by the end of 2011. The rating company also noted that Chesapeake’s transition to more liquids production is underway, but the weak price of natural gas brought negative impact to the financial performance of the company since more than three quarters of the current energy production of the company is natural gas.
According to Fitch Ratings, “The weak price realizations for natural gas, combined with aggressive spending in 2012, to accelerate liquids production has resulted in negative free cash flow so far this year of slightly over $10 billion, some of which has been offset by asset sales and monetization to date.”
Fitch Ratings estimated that Chesapeake’s adjusted debt to flowing boe per day was $35,000/boe/d, and its adjusted debt/proved developed reserves (PD) were over $12/PD for the third quarter that ended September 30. The computation includes preferred equity, non-controlling interests, future lease operating expenses related to volumetric production payment (VPP) agreements, and many others.
Furthermore, Fitch Ratings said, Chesapeake Energy Corporation (NYSE:CHK)’s negative free cash flow in 2012 is expected to be funded by its asset sales and monetization. The credit rating company anticipates a negative free cash flow if Chesapeake maintains its aggressive spending plans.
Below is Fitch Ratings for Chesapeake:
• IDR –BB
• Senior unsecured notes- BB-
• Senior secured revolving credit facility- BBB-
• Convertible preferred stock B
• $2 billion senior unsecured term loan BB-
• Rating Outlook- Negative