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Chesapeake Gets More Bad Marks from Fitch, Proxy Groups

Fitch Ratings late Friday downgraded Chesapeake Energy Corp.'s issuer default rating (IDR) and senior unsecured ratings to "BB-" from "BB," cut preferred stock ratings to "B" from "B+" and affirmed the senior secured revolving credit facility at "BBB-." The IDR is a relative measure of default probability.

Earlier this month Fitch cut Chesapeake's credit rating to "negative" from "stable" because of the producer's aggressive spending program in light of the sustained slide in natural gas prices (see Daily GPI, May 10). Standard & Poor's Ratings Services and Moody's Investors Service also have reduced Chesapeake's corporate credit ratings in the past few weeks (see Daily GPI, May 16).

Aggressive spending, as well as corporate governance, again were cited by Fitch.

"Near term, Fitch believes that Chesapeake will be successful in monetizing its Permian assets and executing a joint venture in its Mississippi Lime properties in Oklahoma and Kansas," said analysts. With the sales proceeds Chesapeake should be able to "easily" repay a $4 billion term loan it secured last week.

However, "Fitch believes liquidity could remain a concern given low natural gas prices even post the Permian sale and Mississippi Lime joint venture."

On Monday, Egan-Jones Proxy Services and Institutional Shareholder Services recommended against reelecting two directors to the board at the annual meeting in June. Egan-Jones said Chesapeake had earned a corporate governance rating of "D+." The two proxy groups also recommended shareholders turn down the executive compensation plan approved by the board.

Egan-Jones said its review centered on proposals that maximized shareholder value based on publicly available information, and noted the recent media attention that has swirled around CEO Aubrey McClendon's financial transactions with related parties to the corporation, financial commitments made by the corporation in which McClendon also has interests -- such as his 20% ownership of the Oklahoma Thunder National Basketball Association franchise -- and the elevated spending by the corporation in light of low gas prices.

Board members Richard K. Davidson, former CEO of Union Pacific Corp., and Oklahoma State University President V. Burns Hargis, who also are members of the audit committee, "appear qualified" but clients should "withhold" their votes to reelect them "due to egregiously weak board oversight," said the firm. Last week the City of New York Office of the Comptroller, which represents pension funds that control 1.9 million shares of Chesapeake, also said it opposed the reelection of Hargis and Davidson (see Daily GPI, May 21).

Staggered terms for Chesapeake's directors "increase the difficulty for shareholders of making fundamental changes to the composition and behavior of the board," noted Egan-Jones. "We prefer that the entire board of a company be elected annually to provide appropriate responsiveness to shareholders."

Added ISS, "The continuing directors serving on this board have repeatedly failed to respond to significant shareholder concerns and emerging best practices, demonstrating a lack of independent oversight."

Trefis analysts noted Monday that Chesapeake "had viewed asset sales as its financial savior in this tumultuous time...as its core natural gas business performed dismally on account of falling prices...As it stands, Chesapeake will fail to meet its previously promised 25/25 plan to reduce debt by 25% to $9.5 billion and also increase production by 25% by the end of year...

"We are in the process of revising our price estimate for the company's stock in order to incorporate the asset sale delays as well as the current pricing environment. Additionally we will likely reflect the stock's volatility by increasing our cost of capital for the firm."

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