Fitch rates Chesapeake notes BB-, convertibles B

Fitch Ratings assigned a BB- rating to Chesapeake Energy's new $200 million senior notes and a B rating to its new $150 million convertible preferreds. Fitch maintained its BB+ rating on the senior secured bank facility. The outlook remains positive.

The net proceeds from these offerings will be used to permanently fund its recent acquisition of Laredo Energy, LP. In late October, Chesapeake agreed to acquire $200 million of south Texas natural gas assets from Houston-based privately owned Laredo Energy, L.P. and its partners. In this transaction, Chesapeake acquired approximately 108 billion cubic feet of natural gas equivalent (bcfe) proved reserves and 30 million cubic feet of natural gas equivalent (mmcfe) of daily production. The valuation of the proved reserves is about $1.85 per thousand cubic feet of natural gas equivalent (mcfe). However, management stated that $48 million was allocated for 88 bcfe of probable and possible reserves, which would lower the proved reserve valuation to $1.41 per mcfe. This transaction increases reserves by approximately 4% to 3.1 trillion cubic feet of natural gas equivalent (tcfe) and daily production by about 4% to just over 800 mmcfe per day.

Although these assets are in the Lobo Trend of South Texas, the properties have similar attributes to Chesapeake's existing asset base in the Mid Continent. The Laredo assets are 100% natural gas, have low lifting costs and are located in a region with good infrastructure. Chesapeake believes the deep drilling and tight sands completion expertise it has developed in the Mid Continent will transfer nicely to this region which has a similar geological makeup.

Fitch said its ratings reflect Chesapeake Energy Corp.'s long-lived, focused natural gas reserve base, its ability to generate high margins and its improving credit profile.

In the latest 12 months, Chesapeake generated about $940 million of EBITDA, providing adjusted interest coverage of approximately 6.2 times and adjusted debt-to-EBITDA of 2.4x, Fitch added. Commensurate with its current rating, Chesapeake's $2.3 billion of debt provides a debt per mcfe of $0.72, or $4.34 per barrel of oil equivalent.

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