CHICAGO--(BUSINESS WIRE)--Fitch Ratings has revised Chesapeake Energy's Rating Outlook to Positive from Stable and affirmed, along with various other ratings, Chesapeake's Long-term Issuer Default Rating (IDR) at 'BB-'. A full list of ratings follows at the end of this release. The rating affirmation affects approximately $15 billion in rated securities.
The Outlook revision is driven by Chesapeake management's stated intention to delever and simplify its capital structure, its much improved liquidity position, expectations of significantly reduced free cash flow deficits and higher cash flow generation going forward. Additionally, better natural gas realizations are factored into the Outlook.
KEY RATING DRIVERS
Chesapeake's ratings reflect the company's large asset base, operating profile and relatively high adjusted leverage. As of year-end 2013, Chesapeake had almost 2.7 billion barrels of oil equivalent (boe) in proved reserves with 68% of those being proved developed reserves (PD). The company 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. Production in the first quarter of 675,200 boe per day was comprised of 16% oil, 13% NGLs and 71% natural gas on an oil equivalent basis and makes Chesapeake the second largest natural gas producer in the US and the tenth largest in terms of liquids.
The company's adjusted leverage offsets the strengths of the company's large size and operating profile. Balance sheet debt of approximately $13 billion is augmented by debt-like items such as other long-term liabilities, minority interests of non-guarantor subsidiaries, volumetric production payment liabilities, preferred stock, etc. that add approximately another $7 billion in additional leverage per Fitch calculations. After these Fitch adjustments, adjusted debt is over $20 billion resulting in adjusted debt/proved reserves of approximately $7.70 as of Dec. 31, 2013. Adjusted debt/PD and adjusted debt/production were approximately $11.40/PD and $31,000/boe per day, respectively.
Operationally, Chesapeake is forecasting that its production for 2014 will average between 690,000 - 710,000 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. Capital spending of $5.2 - $5.6 billion continues to be directed at liquids growth. Currently, a little over half of Chesapeake's production comes from the Marcellus North, the Mid-Continent region and the Eagle Ford Shale. Efficiency gains for drilling, procurement, etc. should help to expand margins and improve capital costs on a boe basis.
The company's three year average finding, development and acquisition cost per Fitch's calculations is $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.
Liquidity is provided by operating cash flows, the company's untapped $4 billion corporate senior secured credit facility (due December 15) and its $500 million oilfield services subsidiary secured revolver (due November 16). 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 covenants state that maximum debt/EBITDA must be less than 4.0x and maximum consolidated indebtedness to consolidated total capitalization must be less than 70%. Chesapeake was well within these covenants at the end of the first quarter. Near-term maturities are $319 million of the remaining 9.5% senior notes due 2015 and the $396 million in 2.75% contingent convertible senior notes due 2035 that can be put to or called by Chesapeake in late 2015. Maturities for 2016 include $500 million in 3.25% senior notes and the amount outstanding ($464 million) on the company's oilfield subsidiary's secured revolver.
Fitch expects that Chesapeake will spin off its oilfield service subsidiary this year resulting in aggregate debt reduction of approximately $1 billion but also a loss of EBITDA of approximately $350 million. Nevertheless, this move will help the company focus on its core E&P business and simplify the capital structure. The company's free cash flow deficit should continue to shrink and Fitch expects it will be approximately $1 billion inclusive of capitalized interest, dividends and distributions. Proceeds from asset sales are expected to make up the difference. Adjusted debt to EBITDA is expected to be over 3 times for 2014. Going forward, Fitch expects Chesapeake to fund capital spending, capitalized interest and dividends and distributions with operating cash flow and to continue to divest non-core assets in an effort to further delever.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Material 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:
--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 affirms Chesapeake's ratings as follows:
--IDR at 'BB-';
--Senior unsecured notes at 'BB-';
--Senior secured revolving credit facility at 'BBB-';
--Convertible preferred stock at 'B'.
The Rating Outlook is Positive.
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
Cash Flow Trends in the U.S. Energy Sector (Shareholder Activism Having an Impact)
Scenario Analysis: Lifting the Crude Export Ban (Overall Credit Impact Limited but Varies by Industry)
2014 Outlook: North American Oil & Gas (Strong Oil Prices Continue to Support Energy Complex)