Originally Posted by
Maynard
TEXT-Fitch revises Chesapeake Energy outlook to negative 05/04 09:15 AM
--------------------------------------------------------------------------------
(The following statement was released by the rating agency)
May 4 - Fitch Ratings has revised Chesapeake Energy Corporation's Rating Outlook to Negative from Stable. In addition, Fitch affirms the company's existing ratings. A complete list of ratings is provided at the end of this release. Approximately $13 billion in debt is affected by today's rating action. The revised Outlook stems from a still aggressive capital spending program for 2012 in a very weak natural gas environment. The company's 2012 spending plans remain essentially unchanged in terms of magnitude and will create a large funding gap between cash flow from operations and capital spending and leasehold acquisitions which is expected to be filled mostly from proceeds from asset sales and various monetizations. Given the size of this gap (estimated by Fitch to be approximately $10 billion for 2012) Fitch believes that the company's credit quality is likely to come under pressure. As result of weak natural gas prices, operating cash flow before changes in working capital was just $910 million for the quarter. The difference between this and amounts spent during the quarter for capital expenditures and leasehold acquisition led to an increase in long-term debt of approximately 23%, from $10.6 billion at year-end 2011 to approximately $13 billion at March 31, 2012.
Long-term debt plus non-controlling interests increased 29% to $15,455 at March, 31, 2012 from $11,963 at year-end 2011. Given the weak natural gas pricing environment, there exists the potential for a shortfall or delay in some of the expected proceeds from the remaining planned asset sales and monetizations this year. In the first quarter (1Q), Chesapeake announced an upward revision to 2012 capex guidance for well costs on proved properties from the $6 billion-$6.5 billion range to the $6.5 billion-$7 billion range, and for acquisition of unproved properties from $1.4 billion to $1.6 billion, despite the dramatic fall-off in organic cash flow from weak natural gas prices. Also of note was the fact that the company spent $2,182 million and $1,079 million in these categories respectively in the 1Q. While it had been clear that the 1Q would be higher than the remainder of the year due to time required to ramp down spending, these levels leave relatively little room in the next three quarters for the company to stay within its full year capex guidance. Fitch anticipates the company will be sharply free cash flow negative over the next three years.
Chesapeake also announced an increase in the projected level of asset sales to meet the company's funding needs: Chesapeake has increased its planned asset sales in 2012 from $10 billion-$12 billion to $11.5 billion-$14 billion range. The inventory of assets to sell is deep (Permian Basin, Mississippi Lime, Eagle Ford VPP, Chesapeake Oilfield Services IPO), but the extent of sales raises questions about the ability to execute on all of these transactions in such a short timeframe, and the potential impact that sales could have on core operations and medium term growth prospects. The largest mitigating factors to this concern are Chesapeake's robust track record in executing monetizations at attractive valuations over the past four years, and the updated guidance still provides for $1.6 billion-$2.65 billion in post-asset sale free cash flow for debt pay down (before working capital changes). This debt is not maturing in 2012, which provides some flexibility to the expected funding requirements.
Catalysts for a downgrade center among other things on the potential for further increases in debt levels, driven by failure to stay within outlined capital spending targets; further erosion in natural gas pricing; an inability to execute on asset monetizations on a timely basis, or a shortfall in monetization proceeds. Other negative catalysts include additional encumbrances of assets, or downward revisions to production guidance for 2012 or 2013. Corporate governance and Board of Director oversight remains a concern. Some initial steps have been recently taken that could positively affect governance and oversight over the long term. However, these are only initial steps and bear monitoring as governance and oversight can pose indirect issues for bondholders. Liquidity is primarily provided by the company's $4 billion senior secured revolver due 2015. 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 (4.0 times covenant level).
Fitch has affirmed the ratings for Chesapeake as follows: --Issuer Default Rating (IDR) at 'BB'; --Senior unsecured debt at 'BB'; --Senior secured revolving credit facility at 'BBB-'; --Convertible preferred stock at 'B+'. The Rating Outlook is Negative. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Bookmarks