Chesapeake Must Sell at Least $7 Billion of Assets to Avoid Faulting on Debt

A team of analysts led by Peter Speer from Moody’s Investor Service has announced that Chesapeake Energy Corp must sell at least $7 billion in assets this year to avoid breaching the term of their loans and receiving a credit downgrade.

Chesapeake, the largest US natural gas producer after Exxon Mobil Corp., is in the midst of a cash flow crisis after the CEO Aubrey McClendon allowed hedging contracts to expire in late 2011, leaving the company exposed when natural gas prices fell to their lowest level in ten years.

The company has already taken out a $4 billion loan this month to try and ease its cash flow problems, but Speer still expects them to exceed their debt restrictions, which limit debt to four times earnings before interest, taxes, depreciation and amortization, later in the year.

James Sullivan, and analyst at Alembic Global Advisors, has calculated that the shortfall in cash could exceed $15 billion this year, and then another $7 billion in 2013.

“Even $7 billion in asset sales could place Chesapeake’s covenant compliance for its revolving credit facility in some doubt, and the company would still face a significant funding gap in 2013,” Speer wrote. “Asset sales much below $7 billion, meanwhile, would likely lead to a downgrade.”

McClendon plans to sell oil and gas assets in several states including Texas, Oklahoma, and Kansas, in an attempt to free up capital and avoid further cash flow problems and defaulting on its debt. The 1.5 million acres in Texas’ Permian Basin alone could raise between $4 and $6 billion.

By. Joao Peixe of Oilprice.com