Tuesday, May 15, 2012 10:58:18 AM
CHK - Chesapeake Energy’s Chief, Under Investor Pressure, Seeks to Win Over Skeptics
New York TimesBy CLIFFORD KRAUSS | New York Times – 3 hours ago
HOUSTON — Chesapeake Energy sought to calm investors on Monday by disclosing details of a new $3 billion unsecured bridge loan aimed at buying time for the financially beleaguered company to bargain for the best terms in selling valuable oil fields in West Texas and other assets.
Plummeting natural gas prices have put Chesapeake, the nation’s second-largest gas producer after Exxon Mobil, in a squeeze in recent months, upending a business model that led the company to pile up debt, with long-term liabilities of $13 billion as of March 31, to finance a frenzy of land acquisition and drilling across the country.
The company’s stock, which has lost about half its value over the last year, went into a tailspin late Friday, dropping 14 percent after Chesapeake warned in a Securities and Exchange Commission filing that it might have to delay the selling of $14 billion in assets to comply with the terms of a critical line of credit. The company, which is based in Oklahoma City, also gave the impression of disarray when it said it would delay releasing its quarterly earnings report, but then filed it anyway just minutes later.
But on Monday, Chesapeake’s chief executive, Aubrey K. McClendon, tried to reassure investors by saying the company was merely postponing the $1 billion sale of future production from its South Texas Eagle Ford oil field along with the spinoff of a drilling subsidiary. He further reiterated that he was fully confident that the company could raise roughly $10 billion from asset sales in Texas, Oklahoma and Kansas this year.
“There are lots of options and lots of levers to pull,” he said. “We will get our asset sales done.”
The prize asset up for sale is 1.5 million acres of the Permian Basin, one of the country’s hottest oil prospects, where Chesapeake is the third-largest leaseholder and 12th-largest producer. With 12 rigs but roughly 25,000 well drilling locations already pinpointed, Mr. McClendon said Chesapeake simply did not have the resources to fully exploit the prospect.
“We couldn’t fund it,” he said. “It needs a bigger company.”
Wall Street analysts have identified Apache, Exxon Mobil and Occidental Petroleum as possible buyers.
Mr. McClendon’s challenge is to sell off the Permian property as a whole or in parts in the next couple of months but not at fire-sale prices. He suggested to analysts that there was so much interest that getting a good price would not be a problem.
“We have a thundering herd coming through,” he said, referring to the data room Chesapeake has set up to show off its prospective fields.
Mr. McClendon has been on the defensive in recent weeks, and he has been forced to give up the chairmanship of the company that he cofounded. Analysts and investors have questioned Chesapeake’s corporate governance amid several recent revelations, including the disclosure that Mr. McClendon ran a $200 million hedge fund that bet on natural gas while his company drilled for it.
Earlier, it was revealed that Mr. McClendon borrowed more than $1 billion from the same financial firms that were simultaneously lending to Chesapeake to pay for drilling wells owned jointly by the company and Mr. McClendon. That left some to wonder if Mr. McClendon was negotiating for preferential treatment on his loans by allowing the company to pay higher rates.
The company board said it was reviewing the deals while considering whom to select as the new company chairman.
The Securities and Exchange Commission has started an informal inquiry into the company’s financial dealings.
Wall Street analysts said Mr. McClendon’s announcements on Monday did not fundamentally change the outlook of the company. But they said the company should have a bit more time to get its finances in order by replacing its dependence on one loan that was secured with collateral that could not be sold with a second unsecured loan that will not restrict the sale of assets.
“This is a short-term lifeline,” said Mark Hanson, an oil company analyst at Morningstar. “This is a company that lives and dies by the capital market. They have enough connections where they can always source additional capital if need be, but at a price.”
The new $3 billion loan comes with an 8.5 percent interest rate, more than twice the rate of the loan it partly replaces. Company executives said they would pay back the loan this year, presumably after the Permian sale, but if they do not, the interest rate will go higher.
“It does give them some more breathing room,” said Philip H. Weiss, an Argus oil analyst. “But I still don’t believe they are in a good position. I still see risk.”
The new loan, Mr. McClendon said, “will provide a long runway.”
Initially, shareholders responded positively to Mr. McClendon’s announcements and to a Wall Street Journal report that the activist investor Carl C. Icahn was acquiring a significant stake in the company. In early morning trading, Chesapeake shares rose sharply, but they gave back much of the gains, ending the day at $15.52, up almost 5 percent.
“I have a good relationship with Carl, and if he comes in, I am pretty confident he will make a lot of money,” Mr. McClendon said.
Mr. Icahn bought a stake in Chesapeake in late 2010, and forced the company to commit to a debt reduction plan before he liquidated his shares.
During his conference call, Mr. McClendon referred to low natural gas prices as a “ball and chain.” He added that “we would not be having this discussion today” had it not been for the unusually warm winter that cut utility heating demand and the price of gas roughly in half.
New York TimesBy CLIFFORD KRAUSS | New York Times – 3 hours ago
HOUSTON — Chesapeake Energy sought to calm investors on Monday by disclosing details of a new $3 billion unsecured bridge loan aimed at buying time for the financially beleaguered company to bargain for the best terms in selling valuable oil fields in West Texas and other assets.
Plummeting natural gas prices have put Chesapeake, the nation’s second-largest gas producer after Exxon Mobil, in a squeeze in recent months, upending a business model that led the company to pile up debt, with long-term liabilities of $13 billion as of March 31, to finance a frenzy of land acquisition and drilling across the country.
The company’s stock, which has lost about half its value over the last year, went into a tailspin late Friday, dropping 14 percent after Chesapeake warned in a Securities and Exchange Commission filing that it might have to delay the selling of $14 billion in assets to comply with the terms of a critical line of credit. The company, which is based in Oklahoma City, also gave the impression of disarray when it said it would delay releasing its quarterly earnings report, but then filed it anyway just minutes later.
But on Monday, Chesapeake’s chief executive, Aubrey K. McClendon, tried to reassure investors by saying the company was merely postponing the $1 billion sale of future production from its South Texas Eagle Ford oil field along with the spinoff of a drilling subsidiary. He further reiterated that he was fully confident that the company could raise roughly $10 billion from asset sales in Texas, Oklahoma and Kansas this year.
“There are lots of options and lots of levers to pull,” he said. “We will get our asset sales done.”
The prize asset up for sale is 1.5 million acres of the Permian Basin, one of the country’s hottest oil prospects, where Chesapeake is the third-largest leaseholder and 12th-largest producer. With 12 rigs but roughly 25,000 well drilling locations already pinpointed, Mr. McClendon said Chesapeake simply did not have the resources to fully exploit the prospect.
“We couldn’t fund it,” he said. “It needs a bigger company.”
Wall Street analysts have identified Apache, Exxon Mobil and Occidental Petroleum as possible buyers.
Mr. McClendon’s challenge is to sell off the Permian property as a whole or in parts in the next couple of months but not at fire-sale prices. He suggested to analysts that there was so much interest that getting a good price would not be a problem.
“We have a thundering herd coming through,” he said, referring to the data room Chesapeake has set up to show off its prospective fields.
Mr. McClendon has been on the defensive in recent weeks, and he has been forced to give up the chairmanship of the company that he cofounded. Analysts and investors have questioned Chesapeake’s corporate governance amid several recent revelations, including the disclosure that Mr. McClendon ran a $200 million hedge fund that bet on natural gas while his company drilled for it.
Earlier, it was revealed that Mr. McClendon borrowed more than $1 billion from the same financial firms that were simultaneously lending to Chesapeake to pay for drilling wells owned jointly by the company and Mr. McClendon. That left some to wonder if Mr. McClendon was negotiating for preferential treatment on his loans by allowing the company to pay higher rates.
The company board said it was reviewing the deals while considering whom to select as the new company chairman.
The Securities and Exchange Commission has started an informal inquiry into the company’s financial dealings.
Wall Street analysts said Mr. McClendon’s announcements on Monday did not fundamentally change the outlook of the company. But they said the company should have a bit more time to get its finances in order by replacing its dependence on one loan that was secured with collateral that could not be sold with a second unsecured loan that will not restrict the sale of assets.
“This is a short-term lifeline,” said Mark Hanson, an oil company analyst at Morningstar. “This is a company that lives and dies by the capital market. They have enough connections where they can always source additional capital if need be, but at a price.”
The new $3 billion loan comes with an 8.5 percent interest rate, more than twice the rate of the loan it partly replaces. Company executives said they would pay back the loan this year, presumably after the Permian sale, but if they do not, the interest rate will go higher.
“It does give them some more breathing room,” said Philip H. Weiss, an Argus oil analyst. “But I still don’t believe they are in a good position. I still see risk.”
The new loan, Mr. McClendon said, “will provide a long runway.”
Initially, shareholders responded positively to Mr. McClendon’s announcements and to a Wall Street Journal report that the activist investor Carl C. Icahn was acquiring a significant stake in the company. In early morning trading, Chesapeake shares rose sharply, but they gave back much of the gains, ending the day at $15.52, up almost 5 percent.
“I have a good relationship with Carl, and if he comes in, I am pretty confident he will make a lot of money,” Mr. McClendon said.
Mr. Icahn bought a stake in Chesapeake in late 2010, and forced the company to commit to a debt reduction plan before he liquidated his shares.
During his conference call, Mr. McClendon referred to low natural gas prices as a “ball and chain.” He added that “we would not be having this discussion today” had it not been for the unusually warm winter that cut utility heating demand and the price of gas roughly in half.
Join the InvestorsHub Community
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
