NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Long-term Issuer Default Rating (LT IDR) and senior unsecured ratings for Chesapeake Energy Corporation (Chesapeake). In addition, Fitch has affirmed the ratings on the company's secured credit facility and its preferred stock. Approximately $16 billion in rated securities is affected by this rating action. A full list of ratings is at the end of this release. The Rating Outlook has been revised to Stable from Negative.
KEY RATING DRIVERS
Chesapeake's ratings reflect a very large asset base and production profile coupled with relatively high adjusted leverage for a firm its size. The company is second largest natural gas producer in the U.S., accounting for approximately 4% of total production, and the 11th largest producer of oil and natural gas liquids in the U.S. Proved reserves at the end of 2012 totaled 2.6 billion boe and production in first quarter 2013 (1Q'13) was 666,600 boe/d split approximately 76% natural gas, 16% crude oil and 8% natural gas liquids (NGLs). Total balance sheet debt at the end of the first quarter was approximately $13.5 billion, which translated to an LTM unadjusted debt/EBITDA of approximately 3.6x.
While balance sheet debt was approximately $13.5 billion at the end of March, Fitch makes adjustments, such as adding minority interests, Volumetric Production Payment obligations, asset retirement obligations, other long-term obligations, etc. After these adjustments are made, adjusted debt is approximately $18.8 billion. After preferred stock of $3 billion the figure rises to over $21 billion. As a result, adjusted debt/Proved Developed was $11.76/PD at the end of 2012 and adjusted debt/daily production was approximately $27,000/boe per day. Adjusted debt plus preferreds/PD was $13.81/PD and adjusted debt plus preferreds/daily production was approximately $31,700 at the end of last year.
For 2013, Fitch estimates EBITDA for Chesapeake should rise to between $4.5 billion-$5 billion, resulting in an unadjusted debt/EBITDA of near 3x. Given those EBITDA expectations, Chesapeake should not have difficulty with revised revolver covenants for 2013 (4.5x for June 30, 2013, 4.25x for Sept.30, 2013 and 4x for Dec. 31, 2013). Fitch's free cash flow (FCF) expectation for 2013 is that the company will be have a FCF deficit of approximately $3.5 billion which will be funded with a minimum of $4 billion in assets sales. This deficit is significantly smaller than last year's. Expectations for 2014 are for a somewhat smaller funding gap which will again be funded with asset sales. These deficits continue near-term as result of the company's efforts to increase liquids production that have higher realizations and margins than that of natural gas.
Operationally, Chesapeake expects roughly flat production this year versus 2012. This follows a 19% production increase in 2012 and 15% increase for 2011. Liquids production continues to increase quarterly and now stands at approximately 24% of total production compared to less than 10% three years ago. Expectations are for further single-digit percentage production increases in 2014. In terms of reserve and costs, Chesapeake's three-year average finding, development and acquisition costs are approximately $20 per barrel of oil equivalent, which is competitive within its peer group.
Chesapeake's liquidity comes primarily from its $4 billion secured credit facility that expires in 2015. As of the end of the first quarter, the company had slightly over $3.1 billion in available liquidity on this facility after drawings of $832 million and letters of credit of $31 million. The company also derives liquidity from a secured credit facility ($500 million) at its oilfield services unit that was mostly drawn at quarter-end as well as from continuing asset sales. Going forward, Fitch expects that the company will maintain a larger liquidity buffer than it has historically. The company's next major maturities occur in 2015 when approximately $2.5 billion potentially comes due.
The Outlook revision reflects a stronger natural gas price outlook for 2013 and 2014 and, as a result, a stronger outlook for cash flows. Additionally factored into the revision is better available liquidity, expected completion of at least $4 billion in asset sales before year-end, and Fitch's expectations of a more conservative financial strategy given the revamp in the Board of Directors over course of the last year.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Material progress in deleveraging the balance sheet relative to reserves and production;
--Much stronger cash flow generation leading to consistent and significant positive free cash flow generation.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Increased debt levels relative to reserves and production;
--Weak natural gas or crude prices leading to a reduction in expected cash flow;
--Marked decrease in production levels or proved developed reserves relative to debt;
--Reduction in available liquidity.
Fitch affirms Chesapeake as follows:
--LT IDR at 'BB-';
--Unsecured Term Loan at 'BB-';
--Senior unsecured notes at 'BB-';
--Senior secured revolving credit facility at 'BBB-';
--Convertible preferred stock at 'B''.
The Rating Outlook is now Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Oil and Gas Exploration and Production Companies: Sector Credit Factors' (Aug. 9, 2012).
Applicable Criteria and Related Research
Rating Oil and Gas Production Companies
Corporate Rating Methodology