Chesapeake Energy Corporation: Counterparties Asking For Collateral After Debt Downgrade

Chesapeake Energy Corporation: Counterparties Asking For Collateral After Debt Downgrade

Chesapeake Energy’s counterparties, including pipeline companies, are now asking it for collateral following the debt downgrades from rating agencies in December and the downturn in crude prices, the U.S. shale producer said Thursday. Apart from Chesapeake, other companies too are in a similar spot owing to the recent energy downgrades, Reuters says.

It may need to put more collateral

In December, ratings agencies Moody’s and Standard & Poor lowered the company’s credit rating “further into junk territory” with crude oil lingering at around $30 a barrel, says the media outlet. The downturn in crude oil prices is taking a toll on the cash flows of U.S. shale operators.

In a filing with the SEC, the Oklahoma City company said, “Some of our counterparties have requested or required us to post collateral as financial assurance of our performance under certain contractual arrangements, such as transportation, gathering, processing and hedging agreements.”

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Chesapeake Energy revealed that through Feb. 24, it had been asked to render about $220 million in collateral. It has already posted about $92 million in the form of cash and letters of credit. The second-largest U.S. producer of natural gas fears that it may have to put up $698 million in additional collateral, and this would adversely impact its liquidity, the filing says.

Chesapeake aims to lower capex

On Wednesday, Chesapeake Energy reported full year results, posting a loss of almost $15 billion. The company has $9.7 billion in debt, while its borrowing capacity is at $4 billion. The energy company said it aims to lower its capital expenditures this year by about 57% to between $1.3 billion and $1.8 billion. The company also plans to sell assets worth between $500 million and $1 billion this year. After adjusting for asset sales, management expects production for the year to be flat to down 5%.

Chesapeake did well during the U.S. shale gas boom of the 2000s. The energy firm expanded rapidly under its founder Aubrey McClendon, who left the company in 2013 amid a controversy. But under Doug Lawler, its current CEO, the company is focusing more on lowering its massive debt load and transitioning to increased production of crude and other liquids.

On Thursday, Chesapeake Energy closed up 0.39% at $2.57. Year to date, the stock is down by almost 42%, while in the last year, it is down by over 87%. In premarket trading today, Chesapeake shares were trading up.

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