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Chesapeake Gets Ratings Boost from S&P

Standard & Poor's Ratings Services (S&P) on Friday revised its outlook for Chesapeake Energy Corp. to "stable" from "negative," citing the new CEO as part of the reason. Former Anadarko Petroleum Corp. executive Doug Lawler took over in June (see NGI, May 27).

Under Lawler, "we believe the company could well pursue a more moderate growth strategy than previously, while enhancing its profitability and deleveraging its capital structure," analysts said. The rating outlook was revised to "stable" from "negative," which reflects "our view that there is now diminished likelihood of a downgrade over the next year."

S&P also affirmed a "BB-" rating on the company's senior unsecured notes. The "recovery rating on these notes is '3,' which indicates our expectation of meaningful (50-75%) recovery in the event of a payment default." Chesapeake' business risk profile now is "satisfactory," while the financial risk profile is considered "aggressive," said S&P credit analyst Scott Sprinzen.

The exploration and production (E&P) company is the second-largest U.S. natural gas producer after ExxonMobil Corp. and is the 11th largest liquids producer, he said.

Lawler took the helm at Chesapeake following the ouster in April of co-founder and charismatic leader Aubrey McClendon, who amassed a huge U.S. shale gas position and a huge debt just before gas prices declined and most producers turned to oil (see NGI, Feb. 4).

"Historically, natural gas had been the focus of the company's growth initiatives and accounted for a disproportionate 70% of reserves as of year-end 2012," said Sprinzen. "However, in recent years, in response to weak natural gas prices amid rapidly rising U.S. industry production, Chesapeake, like most other North American E&P companies, has put more emphasis on increasing its output of oil and natural gas liquids, for which pricing has been more favorable. In Chesapeake's case, this has entailed massive investment...

"Under the new CEO, we believe that Chesapeake could well take a more disciplined and conservative approach regarding business strategy and financial policy." S&P plans to reassess the ratings when it has a "clearer picture" of the strategy and financial policy under Lawler. Chesapeake is scheduled to issue its second quarter earnings and operations report on Thursday (Aug. 1).

"There is the potential that financial leverage could be meaningfully reduced if Chesapeake sustains capital spending at lower levels than in recent years and it completes substantial additional asset sales," said Sprinzen. If Chesapeake were able to sustain an adjusted debt to earnings ratio of less than 3.5X, "we could raise the ratings." However, the rating "could be jeopardized" if the ratio were above the 5x level for a sustained period.

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