Analysis: Sharks circle McClendon's Chesapeake

Mon May 14, 2012 5:46pm EDT
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By Anna Driver and Carrick Mollenkamp

HOUSTON/NEW YORK (Reuters) - Chesapeake Energy Corp's increasing shift from bank loans to costly funding is raising fresh questions about how long the spigot of cash will remain open and whether the company can sell enough assets quickly enough to pay for day-to-day operations.

The company's problems were brought into sharp focus Monday when CEO Aubrey McClendon, who has a reputation for scrambling to close financing deals, told skeptical stock and bond holders how his company will use a loan from Jefferies & Co. and Goldman Sachs to pay down a $4 billion loan commitment from banks.

While McClendon expressed confidence Chesapeake can find buyers for assets, the $3 billion loan announced on Friday evening was a sign that potential bidders were taking advantage of the company's weakening liquidity and offering low-ball bids for assets.

"The way I look at is, I know they have some desirable assets," Phil Weiss, analyst at Argus Research, said. "At some point, doesn't the buyer on the other side of the table say 'this company is in trouble, I'm going to hold out for better?'"

The company's shares fell nearly 14 percent on Friday after Chesapeake said in a quarterly filing it would delay or cancel a production deal on oil-rich acreage in South Texas, a transaction that would have brought in $1 billion for the cash-starved company.

Seeking to reassure investors, the Oklahoma City, Oklahoma company said on Monday it is on track to close deals that will bring up to $11.5 billion this year, funds that are essential to closing a gap of around $9 billion. Shares closed up nearly 5 percent on Monday, but are down over 30 percent for the year.

While the loan provides some short-term relief, worries remain. Bond investors are nervous not only about future asset sales, which are effectively required by the new loan, but also about other new loans that may become secured ahead of the bonds, according to Alexander Diaz-Matos of New York credit-research firm Covenant Review LLC.

"I see this term loan today and I worry what is the next step," said Diaz-Matos, a lawyer and expert in bond covenants. "The loan has a blanket protection against future secured debt," Diaz-Matos said, noting that is the "top-line concern" for bond investors, "who don't have meaningful protection against secured loans."   Continued...

Chesapeake Energy Corporation CEO Aubrey McClendon walks through the French Quarter in New Orleans, Louisiana in this March 26, 2012 file photo. REUTERS/Sean Gardner/Files