Sometimes it pays to make friends in the financial industry. When Chesapeake Energy Corporation (NYSE:CHK) was acquisition hungry in the bullish natural gas period starting in 2007, the firm relied heavily on investment banking firm Jefferies Group, Inc. (NYSE:JEF), particularly the Vice-Chairman Ralph Eads, to close out a number of deals for new properties. Now that times have changed and Chesapeake is looking to unload valuable oil assets in order to generate sufficient cash flow to maintain operations, Chesapeake has found a familiar friend willing to lend a hand, and money.
Chesapeake recently relied on Jefferies, along with Goldman Sachs Inc. (NYSE:GS) to provide a $4 billion operating loan in order to sustain current operations. The loan bears an interest rate of 8.5 percent that will increase to 11 percent if it is not repaid or refinanced within a year.
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In the meantime, Jefferies and Goldman continue to work towards the sale of key oil properties on behalf of Chesapeake as the energy firm struggles to cope with low gas prices and the cost of the $28 billion acquisition spree the firm undertook when times were good. Fitch Ratings has predicted that Chesapeake will face a cash flow deficit of $10 billion this year, jeopardizing the firm’s liquidity. Jefferies is certainly a qualified banker in terms of energy deals, advising most shale gas transactions this year, including a $1.45 billion partnership between EnCana (ECA) and Mitsubishi in Alberta, Canada. Jefferies is the fifth largest exploration and production (E&P) advisor in North America last year.
Chesapeake Energy Corporation (NYSE:CHK) is currently looking for either an asset sale or a joint venture partnership for oil rich properties such as its Permian basin play or its Mississippi Lime assets. The Permian assets alone could fetch upwards of $6.8 billion, which would remedy much of Chesapeake’s short-term cash flow concerns, at least for this year.
Chesapeake Energy Corporation (NYSE:CHK)’s stock price has been hit hard this year over concerns that the firm has acquired too much, too quickly at the top of the commodity cycle. The firm is down over 50% in the last year.