Stung by low natural gas prices and the slower-than-anticipated turnaround to more lucrative liquids targets, Chesapeake Energy Corp. is selling $2.3 billion in senior notes in three separate series due in 2016, 2021 and 2023 to pare more expensive debt that matures this year.

The tender offerings, launched on Monday, including $500 million in 3.25% senior notes due in 2016; $700 million in 5.375% notes due in 2021; and $1.1 billion in 5.75% notes due in 2023. Chesapeake’s long-term debt was about $12.6 billion at the end of 2012.

Some of the net proceeds from the offerings are to be used to buy a portion of the 7.625% senior notes due this year, as well as 6.875% senior notes due in 2018. A “substantial portion of the remaining net proceeds” could go to redeem 6.775% senior notes due in 2019 at par value. Any other net proceeds could be used to redeem some of the 7.625% senior notes due this year that aren’t tendered in the offer, as well as to repay other outstanding debt.

Analysts reacted negatively to the offerings. Moody’s Investors Service assigned “Ba3″ to the offerings, reflecting an expectation that the proceeds would be used to purchase or redeem maturing and other outstanding debt,” said Vice President Pete Speer. “The negative outlook highlights our concern regarding the company completing sufficient asset sales this year to both fund its capital expenditures and meaningfully reduce debt.”

To reduce debt the company has to raise more than its estimated $4 billion in negative cash flow this year, Speer and other analysts said.

“While this funding gap is much lower than 2012, we are concerned that the company may be challenged to sustain its overall production levels as forecasted with the lower level of capital investment. Despite Chesapeake completing nearly $12 billion of asset sales and other asset monetizations during 2012, its reported and adjusted debt still increased by approximately $2 billion.

“The gap between the capital expenditures and cash flows ended up being wider than initially forecasted,” Speer wrote. “The higher adjusted debt combined with the lower proved developed (PD) reserve volumes caused by negative reserve revisions increased debt/PD reserves by $3.00 to approximately $13.50/boe” at the end of 2012.”

The Moody’s analysts said Chesapeake’s rising output kept leverage on production volumes (debt/average daily production) “relatively constant” year/year at about $29,000/boe, “but Chesapeake’s retained cash flow (RCF)/debt declined to 16% in 2012 from 27% in 2011, as low gas prices reduced its cash flows.”

Standard & Poor’s Ratings Services (S&P) assigned a “BB-” rating to reflect “our view of the company’s ‘satisfactory’ business risk profile as one of the largest producers of natural gas and oil in the U.S. and our view of the company’s ‘aggressive’ financial risk profile,” said credit analyst Scott Sprinzen.

“Our rating depends, in part, on the company’s success in its efforts to lessen its reliance on natural gas, while completing asset sales sufficient to fund the portion of capital expenditures not covered by internal cash flow while containing financial leverage. We assume that Chesapeake will benefit from ongoing increases in its liquids output,” but “could downgrade the company” if the leverage is above 5.0 times for a sustained period.

Tudor, Pickering, Holt & Co. Inc. (TPH) downgraded the company to “hold” from “trim,” with a target price of $22.46/share. Chesapeake closed down Monday at $22.17/share, off 1.29% from Friday’s close. Equity, said the TPH analysts, is “moving into expensive territory,” with earnings having a “15% downside” to the net asset value of proved, probable and possible reserves at $19.00/share.

“We remain concerned on ’13 liquids growth as the midpoint of the range puts production at 170,000 boe/d versus TPH estimates of 163,000 boe/d,” the firm said. The $4 billion “funding gap should be closed through a handful of additional asset sales” in the Eagle Ford and Marcellus Shales, “but material reduction in debt may be harder to achieve in a softer acquisition and divestiture market.” In addition, “volatility around asset sales and CEO replacement are to be expected.” CEO Aubrey McClendon is retiring effective April 1.

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