Chesapeake ends Q3 with $12.8 billion debt, eyes further asset sales

By Paul Deckelman

New York, Nov. 6 - Chesapeake Energy Corp. ended the 2013 third quarter with about $5.2 billion of liquidity and about $12.8 billion of long-term debt, and it plans to continue its recent program of asset sales in the hope of increasing the former and decreasing the latter.

Asset sales on tap

Robert Douglas "Doug" Lawler, the president and chief executive officer of Oklahoma City-based Chesapeake - the second-largest producer of natural gas in the United States and the 11th largest producer of oil and natural gas liquids - told analysts on Wednesday's conference call following the release of results for the quarter ended Sept. 30 that Chesapeake had received total proceeds from asset sales during the previous several quarters and up to that date of around $3.6 billion.

He said that the company anticipates completing additional asset sales during the current fourth quarter totaling about $600 million, and "we continue to pursue other asset sales transactions that may close in the first half of 2014."

Lawler said that Chesapeake expects to direct the proceeds from these asset sales "toward reducing financial leverage and [balance-sheet] complexity and further enhancing our liquidity. We expect that further transactions will be driven by portfolio optimization rather than near-term funding needs." That marks a clear change from the situation in recent years, under previous management, when Chesapeake began selling off large chunks of its vast portfolio of real estate assets and energy drilling rights it had acquired over the years in order to bridge the gap between its debt service, capital spending and other requirements on the one hand and declining revenues from operations amid falling natural gas prices on the other.

During the question-and-answer portion of the conference call following the formal presentations by Lawler and by the company's executive vice president and chief financial officer, Domenic J. "Nick" Dell'Osso Jr., Lawler said that the company would continue to evaluate the assets in its portfolio for possible sales, adding that "we're in a position with our liquidity and our cash flow generation [that] there's not anything that's going to be sold on a fire sale basis or that needs to be done so that we can fund our capital program next year."

Dell'Osso told analyst who asked about several specific oilfield service enterprises Chesapeake owns that "the reality is we have no need to rush out and just take whatever price is available."

Lawler said that the assets slated for disposal during the fourth quarter are "outside of our primary development plans and focus areas," and their divestment should not have any material impact on the company's overall production levels and revenues.

No maturities till 2015

Dell'Osso said that Chesapeake closed out the third quarter with nearly $5.2 billion of liquidity, consisting of $4 billion of undrawn borrowing availability on the parent company's revolving credit facility, about $215 million of availability under a separate revolver at its oilfield services operation and about $1 billion of unrestricted cash.

He noted that Chesapeake's liquidity position improved by around $430 million versus the end of the second quarter on June 30 and by roughly $840 million from the end of 2012.

Long-term debt, net of cash, ended the quarter at $11.7 billion, down from $12.4 billion at the end of the second quarter and $12.3 billion at the end of 2012.

The total long-term debt load stood at $12.8 billion. According to presentation materials prepared by the company for use on the conference call, Chesapeake has no outstanding maturities for the remainder of this year or next year. In 2015, $1.67 billion of debt is due: $1.27 billion of 9½% senior notes that the company sold in 2009 and $396 million of 2.75% contingent convertible senior notes due 2035 remaining out of the $660 million that it sold in 2005 and that become putable in November 2015. Some $500 million of 3¼% senior notes come due in 2016.

The company has a big maturity wall coming up in 2017, when nearly $4.3 billion of debt is coming due, including $2 billion of term loan debt with an interest rate of 450 basis points over Libor with a 1.25% Libor floor. The 2017 maturities also include $1.17 billion of 2.5% contingent senior convertibles that are becoming putable, although their final maturity date is 2037; $660 million of 6½% senior notes and $447 million of 6¼% senior notes.

After that big slug of maturing debt, the maturity ladder becomes more moderate, with no more maturing debt in any given year than the $1.8 billion of 6 5/8% and 6 7/8% senior notes collectively due in 2020. After the 2017 maturity wall, the capital structure consists solely of junk bond debt other than $347 million of 2.25% contingent senior convertibles due 2038, which become putable in 2018. Chesapeake's longest maturity is $1.1 billion of 5¾% senior notes due 2023 that the company sold at par in March as part of a quick-to-market $2.3 billion three-part offering that also included tranches of three-year and 8.25-year paper. The average maturity is 5.1 years, and the average interest rate is 5.9%, according to the company data.

Simplifying the balance sheet

Dell'Osso said during his presentation that "in line with our strategy, we continue to reduce financial leverage and complexity and have a number of initiatives underway in the fourth quarter of this year that will continue into next year."

For instance, he said, Chesapeake recently repurchased some assets that were subject to sale-leaseback arrangements with financial counterparties including surface real estate in Fort Worth as well as a package of drilling rigs.

He explained that while strictly speaking, these items were not debt as it is commonly understood, they were still future cash obligations to be met, and the company was able to simplify its balance sheet by buying them back at fairly attractive prices.

Dell'Osso told an analyst who asked whether the company is comfortable with its present leverage levels that "I don't feel any current pressure in the market, relative to our current level of leverage, and obviously, the credit markets are favorable, the cost of debt is favorable. However, for the long run, we believe our balance sheet has too much debt on it, and we have a strategic goal to reduce that."

He told the questioner that "we want our balance sheet to be smaller on the leverage side, and we want our overall capital structure to be simpler. And we can do that with the proceeds from asset sales, we can do that with the [cash-flow] proceeds that are thrown off from the business over time, and we'll continue to do so. But there's no real sense of urgency in that - we're not rushing out to create something, to make it happen immediately."

The CFO was asked whether Chesapeake has any specific leverage target, either in terms of absolute debt levels or in terms of a leverage ratio, and said that it really doesn't. While Dell'Osso acknowledged that in the past, Chesapeake had put out specific target numbers for debt reduction - at the beginning of the decade, it had spoken of bringing the debt level down to about $9.5 billion by the end of 2012, a target that was not met - he said that those kind of projections were "related to the company we looked like at the time and the size of our assets at the time."

While he said that Chesapeake "will continue to think about this in terms of ratios and in terms of targets around those ratios - what I'll just continue to say there is that we intend to be an investment-grade company over time. There's no one ratio that's going to lead us to that. It's a measure across the entire balance sheet, that we'll continue to target metrics that drive us toward investment-grade performance."

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