Fitch has upgraded Chesapeake Energy's long-term Issuer Default
Rating (IDR) and senior unsecured ratings to 'BB' from 'BB-' and
also upgraded the company's preferred stock to 'B+' from 'B-. A
full list of ratings actions follows at the end of this release.
The ratings actions affect approximately $14.8 billion in rated
securities.
The Rating Outlook remains Positive.
KEY RATINGS DRIVERS
The upgrade results from the debt reduction and capital
structure simplification that has occurred over the last few
months. Notably, the company has spun-off its oil services division
that resulted in debt reduction of over $1 billion and paid off the
$1.06 billion in preferred interest of CHK Utica, which Fitch
treated as adjusted debt.
The Positive Outlook is driven by Chesapeake management's
intention to further de-lever and simplify its capital structure
and expectations of significantly reduced free cash flow deficits
in the future.
Chesapeake's ratings reflect the company's large asset base,
operating profile and levered capital structure. As of year-end
2013, the company had almost 2.7 billion in proved reserves with
nearly 70% of those being proved developed. Chesapeake has large
attractive asset positions in the Marcellus and Utica Shales, the
Eagle Ford Shale, various plays in the Mid-Continent region, the
Haynesville shale as well as the Barnett and Niobrara Shales.
Expected 2014 production of 685,000-705,000 boe per day is
comprised of approximately 16% oil, 12% NGLs and 72% natural gas
and makes Chesapeake the second largest natural gas producer in the
U.S. and the 10th largest in terms of liquids. The company's
levered capital structure offsets the strengths of Chesapeake's
asset base and operating profile. Balance sheet debt of $11.5
billion as of June 30, 2014 is augmented by other debt like
obligations such as minority interests, other long-term
liabilities, VPP adjustments, etc. that Fitch includes in its
adjusted debt calculations. Pro forma for the redemption of the CHK
Utica preferred interests in this quarter Fitch estimates adjusted
debt is slightly over $15 billion exclusive of Chesapeake's
preferred stock of approximately $3 billion.
LIQUIDITY
Liquidity is primarily provided by the company's $4 billion
corporate senior secured credit facility (due December 2015) which
was undrawn at quarter end. The corporate credit facility contains
various covenants and restrictive provisions and is fully and
severally guaranteed by Chesapeake and certain of its wholly owned
subsidiaries. The most restrictive of these covenants state that
maximum debt/EBITDA must be less than 4.0X and maximum consolidated
total capitalization must be less than 70%. Chesapeake is well
within these covenants. The company's' near-term maturities are
$396 million in 2.75% contingent convertible senior notes due 2035
that can be put or called by the company in late 2015. Maturities
for 2016 include $500 million in 3.25% senior notes.
CREDIT METRICS & EXPECTATIONS
Currently, Chesapeake has adjusted debt/EBITDA of approximately
3x per Fitch calculations. Remaining asset sales in 2014 are
anticipated to be another $700 million in proceeds. Additionally,
further additional adjusted debt reduction is expected from the
redemption of CHK Cleveland Tonkawa preferred interests. While FCF
deficits have been greatly reduced from prior periods Fitch still
expects the company to be FCF negative by approximately $700
million- $1 billion in 2014 inclusive of capitalized interest and
distributions. Going forward, Fitch expects that the company will
fund capital spending, capitalized interest, dividends and
distributions from operating cash flows.
OPERATIONS
Operationally, Chesapeake is forecasting that its production for
2014 will average between 685,000 - 705,000 boe per day, which is
an absolute increase over 2013's level of 668,483 boe per day. This
continues a trend of annual production increases from Chesapeake
going back years. Currently, a little over half of Chesapeake's
production comes from the Marcellus North, the Mid-Continent region
and the Eagle Ford Shale. Realizations for natural gas relative to
benchmark prices for Chesapeake are challenged because of high
gathering and transport costs. Over time, efficiency gains for
drilling, procurement, etc. on the cost side should help to expand
margins and improve capital costs on a boe basis. The company's
three-year average finding, development and acquisition is solid
with cost per Fitch's calculations at $20.94 per boe while its
three-year average organic F&D cost is $14.51 per boe. Organic
reserve replacement last year was over 200% and Chesapeake's proved
reserve life is a healthy 11 years.
RATING SENSITIVITIES:
Positive: Future developments that may, individually or
collectively lead to positive rating action include:
Reducing adjusted debt/EBITDA to approximately 2.5X or below on
a sustained basis;
Continued progress in deleveraging its capital structure
relative to reserves and production;
Cash flow generation leading to consistent and, at least,
neutral free cash flow generation after capex, capitalized
interest, dividends and distributions.
Negative: Future developments that may, individually or
collectively, lead to negative rating action include:
Mid-cycle adjusted debt/EBITDA or 3.5 or greater on a sustained
basis;
Negative free cash flow after capex, capitalized interest,
dividends and distributions leading to rising adjusted debt levels
relative to reserves and production;
Marked decrease in production levels or proved developed
reserves relative to adjusted debt.
Fitch has taken the following ratings actions on Chesapeake:
--IDR upgraded to 'BB' from 'BB-';
--Senior unsecured notes upgraded to 'BB' from 'BB-';
--Senior secured revolving credit facility affirmed at
'BBB-';
--Convertible preferred stock upgraded to 'B+' from 'B'.
The Rating Outlook remains Positive.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology Including Short-Term Ratings and
Parent and Subsidiary Linkage' (May 28, 2014);
--'Updating Fitch's Oil & Gas Price Deck' (Aug. 8,
2014);
--'Full Cycle Costs for North American E&P' (July 30,
2014);
--'North American Energy Outlook and LNG' (July 16, 2014);
--'North American Exploration and Production Handbook' (July 16,
2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and
Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Updating Fitch's Oil & Gas Price Deck
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754047
Full Cycle Costs for North America E&P (Production Costs
Moderate in 2013)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753198
North American Energy Outlook and LNG
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751784
North American Exploration and Production Handbook
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749557
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=859074
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Fitch RatingsPrimary Analyst:Sean T. Sexton, CFA,
+1-312-368-3130Managing DirectorFitch Ratings, Inc.70 W. Madison
StreetChicago, IL 60602orSecondary Analyst:Dino Kritikos,
+1-312-368-3150DirectororCommittee Chairperson:Michael Weaver,
+1-312-368-3156Managing DirectororBrian Bertsch,
+1-212-908-0549Media Relations, New
Yorkbrian.bertsch@fitchratings.com