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Chesapeake Resuscitated in Spring Redetermination, Visible Liquidity Into 2017

Spring redetermination season has proven to be more lenient than some may have expected, with Chesapeake Energy Corp.’s $4 billion credit line reaffirmed on Monday, giving the onshore producer a lifeline and financial cushion into 2017.

The second-largest natural gas producer in the United States said its bank syndicate group also postponed to June 2017 the next redetermination, providing even more cushion.

"In connection with the redetermination, Chesapeake agreed to pledge additional assets as collateral under the credit agreement," the Oklahoma City-based independent said. "The amendment includes a collateral value coverage test, which may limit Chesapeake's borrowing capacity if its collateral coverage ratio falls below 1.25 times, tested as of March 31, 2017."

The bank syndicate temporarily suspended the senior secured leverage ratio of the covenants until September 2017, when the ratio would revert to 3.5 times until December 2017 before falling to three times thereafter. The interest coverage ratio was reduced to 0.65 times from 1.1 times through March 2017, before it is incrementally increased up to 1.25 times by September 2017.

While the existing maintenance covenants are suspended, Chesapeake agreed to maintain a minimum liquidity amount of $500 million "at all times, increasing to $750 million if its collateral coverage ratio falls below 1.1 times, tested as of Dec. 31, 2016."

The amendment also gives Chesapeake the ability to incur up to $2.5 billion of first lien debt secured on a "pari passu" basis (at the same rate) with the existing obligations under the credit agreement, "subject to payment priority in favor of the existing lenders and subject to the other limitations on junior lien debt set out in the credit agreement."

Chesapeake has not borrowed against its credit line yet, but it burned through most of its cash balance in 2015, which left its liquidity in question because the bank syndicate could have reduced the borrowing base.

"In a nutshell, this agreement buys Chesapeake Energy valuable time because it now has ample liquidity for more than a year to sort out its balance sheet issues," Motley Fool analyst Matt DiLallo wrote. He does not hold a position in Chesapeake. "The company is now free to use its credit to pay off looming debt maturities or fund drilling without having to worry that its line will be cut this fall should oil and gas prices take another tumble. Further, it gives it time to pursue asset sales or debt swap transactions without being under duress."

The redetermination, he said, "is a real positive for Chesapeake Energy, and for the energy sector in general. If Chesapeake Energy's liquidity ran dry and it had to declare bankruptcy, that event could have taken an outsized portion of the sector down with it."

The agreement doesn't guarantee that Chesapeake will survive, but "it does kick the can down the road, so to speak" on the expectation that in a year's time "prices will have improved to the point where the company's cash flow can better support what will hopefully be an improved balance sheet after company completes some more asset sales and debt restructuring."

Banks during this spring determination have been more lenient than expected. For instance, onshore operator WPX Energy Inc. recently received $1.2 billion in commitments on its credit line, even though it sold $1.2 billion in assets that had backed the facility since the start of the year. Its bank syndicate also amended the terms and covenants to provide increased flexibility.

Other producers to navigate spring redetermination, albeit at lower terms, include onshore producer Bill Barrett Corp., which said Monday its bank group set a borrowing base of $335 million, an 11% reduction from the previous base of $375 million. The facility has $335 million of commitments with no borrowings outstanding.

Bill Barrett CEO Scot Woodall said the company was encouraged by the "continued support of our lender group during this challenging environment. Maintaining a borrowing base near our previous commitment level demonstrates the strong economics of our properties and reserve additions." The producer faces another redetermination this fall.

Other independents that have have announced completing redeterminations include Callon Petroleum Co., Exco Resources Inc., W&T Offshore, EV Energy Partners LP (EVEP), Midstates Petroleum Co. Inc., Breitburn Energy Partners LP and Rex Energy Corp. (see Shale DailyMarch 31).

EVEP's senior secured credit facility was decreased to $450 million from $625 million to $450 million. Its ratio covenants also were amended, with the next scheduled redetermination set for October.

"Given the decline in forward commodity prices that banks are using, the borrowing base reduction was in-line with our expectations," EVEP CEO Michael Mercer said. "Accounting for the reduction in available borrowing base capacity, we have over $200 million of liquidity, which is sufficient to meet our near term capital needs."

Callon, a Permian Basin operator whose focus today is in the Midland sub-basin, had its existing $300 million borrowing base reaffirmed with the credit facility unchanged.

"We believe that the outcome of our redetermination is a testament not only to the performance of our Midland Basin assets, but also to the achieved capital and operating cost reductions that have enabled us to continue a measured pace of development and efficiently grow our proved reserve base," said Callon CFO Joe Gatto.

Meanwhile, Exco, which has been financially pressured for months, saw its borrowing base reduced this spring by 13% to $325 million. At the end of March Exco had about $133 million outstanding on its credit agreement and liquidity of $240 million.

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