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Moody's Notes Chesapeake's Progress, Raises Rating

Chesapeake Energy Corp.'s credit rating was upgraded on Tuesday by Moody's Investors Services to "stable" from "negative" because of progress made to reduce capital spending (capex) and improve liquidity.

Moody's also affirmed the "Ba2" corporate family rating and "Ba3" senior unsecured debt ratings. The speculative grade liquidity was affirmed at SGL-3. About $12 billion of rated debt is affected.

"The stable outlook reflects Moody's expectation that Chesapeake will be able to improve its leverage metrics this year and in 2014 through a combination of reserve and production growth and debt reduction," said Moody's Vice President Pete Speer. "The company has made significant progress in reducing its capital spending, hedging its natural gas exposure and increasing its available liquidity."

Chesapeake still is relying on asset sales to fund its capex in excess of operating cash flow, but the funding gap "has been reduced significantly in 2013 and 2014. The company appears to have sufficient financial flexibility to continue growing its oil production while completing enough asset sales over time to reduce debt and financial leverage."

The operator's corporate governance improvements and senior management changes also "have yielded greater capital and financial discipline in 2013," said Speer. Co-founder Aubrey McClendon stepped down April 1, and Anadarko Petroleum Corp.'s Doug Lawler is to take over on June 17.

"Chesapeake appears committed to harvesting oil and, to a lesser extent, natural gas liquids production growth from its existing asset base, while divesting of noncore assets to fill its funding gap and ultimately reduce debt.

"However, the asset sales have tended to take longer to close than initially expected. Consequently, Chesapeake's debt levels increased during the first quarter of 2013, causing its leverage on proved developed (PD) reserves (debt/PD) to rise to nearly $14.00/boe and its cash flow coverage of debt (retained cash flow (RCF)/debt) to remain weak at 16%."

Cash flow this year should be "much stronger" than in 2012 because of higher oil volumes and higher natural gas prices. "Moody's expects Chesapeake's debt/PD to decline toward $12.00/boe over the remainder of 2013 through a combination of reserves growth and debt reduction through asset sales. The company's RCF/Debt should near 20% for 2013 and both leverage metrics should continue to improve in 2014, supporting the stable outlook."

Chesapeake had $3.1 billion of available borrowing capacity on its corporate revolver at the end of March and about $1.4 billion of sales under contract as of May 8, Speer said.

"The proceeds from contracted asset sales and revolver availability should be sufficient to fund anticipated capital expenditures in excess of operating cash flows into 2014. The company's hedged cash flows should result in good headroom for compliance with revolver covenants through the first quarter of 2014. Chesapeake will need to complete further asset sales to achieve any debt reduction and maintain ample revolver availability as the year progresses."

There are caveats. "Debt/PD reserves above $12.00/boe, RCF/debt below 20% or debt/average daily production (ADP) above $35,000/boe on a sustained basis could result in a ratings downgrade," but that appears unlikely this year. Once debt/PD, RCF/debt and debt/ADP are "approaching $9.00/boe, 35% and $25,000/boe on a sustainable basis, it could result in a ratings upgrade to Ba1."

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