Chesapeake ended Q2 with $4.7 billion liquidity; more asset sales, debt reduction possible

By Paul Deckelman

New York, Aug. 2 - Chesapeake Energy Corp. ended the 2013 second quarter with $4.7 billion of liquidity, company executives said - and they held out the prospect of augmenting that liquidity via continued asset sales and then possibly using some of it for debt reduction.

And the Oklahoma City-based oil and natural gas production company has an eventual goal of returning its various credit metrics to investment-grade territory, although it would offer no timetable, nor information about what specific metrics it hopes to improve, or by how much.

An improving picture

Chesapeake's recently installed chief executive officer, Robert Douglas "Doug" Lawler, told analysts on the company's conference call following the release of the second-quarter numbers that "from a balance sheet and liquidity perspective, I am pleased with the accomplishments of the company year to date."

The company's financial position "has strengthened considerably over the past nine months."

For instance, Lawler noted that Chesapeake recently elected to terminate its bank covenant amendment early and return its maximum permitted ratio of long-term debt as a multiple of EBITDA back to 4.0 times from the 4.5 times ratio that would have applied under the amendment as of the end of the second quarter on June 30.

The CEO said that at the quarter's end, Chesapeake's ratio of long-term debt to EBITDA had improved to around 3.0 times.

Besides the sizable quarter's-end liquidity figure - which included $677 million of cash and equivalents, up from $287 million on the balance sheet at the end of 2012 and an undrawn revolving credit line - Lawler declared that "net long-term debt was held essentially flat, compared to year-end 2012."

The balance sheet showed long-term debt, net of discounts of $13.06 billion, although that figure was actually up from $12.16 billion at Dec. 31, 2012.

Asset sales continue

Chesapeake for many years had been one of the most acquisitive of major U.S. energy companies, in terms of aggressively buying millions of acres of proven and potential energy reserves in various large geological formations - but over the past year or so, it has been a net seller of such properties, trying to monetize underperforming or non-core assets in order to cover shortfalls that developed in its operating budget, as capital spending and debt-service costs began outrunning falling natural gas revenues as gas prices softened.

With a large portfolio of such salable assets, Chesapeake has been able to keep up with its costs. But Lawler - a former Anadarko Petroleum Corp. executive who took the reins at Chesapeake in mid-June, replacing company founder and long-time CEO Aubrey K. McClendon following the latter's retirement in April - has set out to change the more free-wheeling corporate culture that he inherited.

He spent much of the conference call talking about the asset sales, but also about the need for Chesapeake to achieve "financial discipline" - rationalizing the company's operations and spending patterns in order to bring capex into line with operating cash flow, so as not to have to continue to depend on asset sales to bridge the gap.

"Our capital expenditures will be balanced with our cash flow from operations," he insisted, outlining plans for planned reductions over time in the number of wells that Chesapeake is operating, and the continued sale of under-utilized or non-core assets.

"We're implementing a new competitive capital allocation process to ensure the highest-quality projects are funded. We will continue to divest our non-core assets and non-core affiliates," he asserted.

Lawler noted that during the first half of 2013, Chesapeake had received proceeds of some $2.4 billion from asset sales - and during the current third quarter, it completed the sale of additional assets for total consideration of about $1 billion, including the sale of assets in the Haynesville Shale formation in Louisiana and eastern Texas and the Eagle Ford Shale in southern Texas.

On top of that, he said that the company was anticipating the completion of a separate deal to sell certain mid-stream assets in the Mississippi Lime play in Oklahoma, which would bring in another roughly $300 million.

"These asset sales, combined with forecasted net operating cash flow, enabled Chesapeake to fully fund its 2013 capital expenditure budget," Lawler said.

Debt paydown a target

He added that "additional asset sales are contemplated for later this year - which may be used to reduce long-term debt and further enhance our financial liquidity."

The company's chief financial officer, Domenic J. "Nick" Dell'Osso Jr., said that debt paydown is "absolutely still a major goal of ours - we expect to have a simplified and improved balance sheet in the coming years," quickly amending his statement to also include "months, as well as years."

But when asked by an analyst during the question-and-answer portion of the call that followed Lawler's formal presentation whether Chesapeake would presumably use some of its liquidity to pay down "a few billion dollars," the CFO demurred, answering that he was "going to stay away from an exact number, because it's going to depend on the opportunity set that's in front of us when we are at the point of excess liquidity and we make that decision."

Aiming for investment grade

Along with Lawler, Dell'Osso did say that the company is "continuing to target investment-grade metrics. It's a goal of the company to be investment grade. We have been making good progress on improving our liquidity, and the next step will be to apply that excess liquidity to our balance sheet when we're ready to do so, which we will feel [is] at some point in the relatively near future, especially as we consider our non-core asset-sale program."

The CFO declined to put a specific timeframe on when Chesapeake may return to investment grade.

"We really can't put any time frame around that - we are focused on it, we have a number of things that we're looking at that will help us to get there, but it's going to be a combination of improved operational performance, taking the proceeds from non-core asset sales, applying them to our balance sheet, et cetera. So it's a process that will take some period of time and we don't have an exact timeframe for it."

When asked which specific credit metrics, Chesapeake might seek to improve in order to regain investment grade status, Dell'Osso said that there are "obviously a number of metrics that we look at, that the agencies look at, that you [analysts] all look at. We could go through the list, but different companies rank stronger in some metrics than others when they get to investment grade. But we're looking at the entire suite, and we know where our strengths are and where our weaknesses are. We're focused on having our entire set of metrics look investment grade over time."

Moody's Investors Service currently gives the company a corporate family rating of Ba2, with a stable outlook and rates its bonds at Ba3, while Standard & Poor's has both the bonds and the corporate credit rating at BB- with a stable outlook.

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