Fitch Rates Chesapeake's $3B Senior Notes Issuance 'BB-'

CHICAGO--()--Fitch Ratings has assigned a 'BB-' rating to Chesapeake Energy's $3 billion senior notes offering due 2019 and 2022. The proceeds of this offering will be used to tender for the 9.5% senior notes due 2015 and to refinance other debt. A full list of ratings appears at the end of this release.

KEY RATINGS DRIVERS

Chesapeake's ratings reflect the large company's size, operating and asset profile and its levered capital structure. At the end of 2013, the company had proved reserves of nearly 2.7 billion barrels of oil equivalent (boe) with 68% of those reserves being proved developed (PD). The company possesses attractive asset positions in the Marcellus Shale, Eagle Ford Shale and Mid-Continent regions among others. Production for 2013 was almost 670,000 boe per day with approximately 25% of it being liquids which the company has increased markedly over the last three years. Still, with 75% of production being natural gas Chesapeake is one of the nation's top producers of the commodity. Per Fitch calculations, adjusted debt to production for 2013 was approximately $31,000 per boe of daily production, and adjusted debt to PD was approximately $11.40 for the year. Both metrics sequentially improved year over year. At year-end 2013 balance sheet debt was nearly $13 billion, and EBITDA improved to $5.2 billion from $3.9 billion in 2012.

Liquidity is provided for by the company's $4 billion secured revolver and expected proceeds from planned asset sales. Key covenants are primarily associated with the secured revolver and include maximum debt-to-book capitalization (70% covenant threshold) and maximum total debt-to-EBITDA. Maturities consist of approximately $1.6 billion in 2015 and $500 million in 2016. For 2014, Fitch's expectations are for Chesapeake to be free cash negative by approximately $1-1.5 billion which will be funded by planned asset sales. The trend in negative free cash flow has come down substantially compared to previous years.

Fitch currently rates Chesapeake as follows:

--IDR 'BB-';

--Senior unsecured notes 'BB-';

--Senior secured revolving credit facility 'BBB-';

--Convertible preferred stock 'B''.

In addition, Fitch has assigned the following rating:

--$3 billion senior unsecured notes 'BB-' due 2019 and 2022.

The Rating Outlook is Stable.

RATING SENSITIVITIES

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;

--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:

--Negative free cash flow leading to rising debt levels relative to reserves and production;

--Marked decrease in production levels or proved developed reserves relative to debt.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Relevant Research:

--'Corporate Rating Methodology' (Aug. 5, 2013);

--'Cash Flow Trends in the U.S. Energy Sector-Shareholder Activism Having an Impact' (Feb. 4, 2014);

--'Scenario Analysis: Lifting the U.S. Crude Export Ban' (Jan. 27, 2014);

--'2014 Outlook: North American Oil & Gas' (Dec. 12, 2013).

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=715139

Cash Flow Trends in the U.S. Energy Sector (Shareholder Activism Having an Impact)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=733556

Scenario Analysis: Lifting the Crude Export Ban (Overall Credit Impact Limited but Varies by Industry)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732055

2014 Outlook: North American Oil & Gas (Strong Oil Prices Continue to Support Energy Complex)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726499

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826639

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Sean T. Sexton, CFA, +1-312-368-3130
Managing Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Dino Kritikos, +1-312-368-3150
Director
or
Media Relations, New York
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Sean T. Sexton, CFA, +1-312-368-3130
Managing Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Dino Kritikos, +1-312-368-3150
Director
or
Media Relations, New York
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com