Chesapeake sees up to $7 billion of asset sales, continued deleveraging

By Paul Deckelman

New York, Feb. 21 - Chesapeake Energy Corp. closed out 2012 with $4 billion of available borrowing capacity on its revolving credit line and expects to be able to sell sufficient assets to raise between $4 billion and $7 billion needed to cover an anticipated $4 billion funding gap this year, paying for its capital spending program and planned continued deleveraging of the Oklahoma City-based oil and natural gas company.

"I'm pleased to report that we are in a completely different position from a liquidity and funding perspective than one year ago," the company's chief financial officer, Dominic J. "Nick" Dell'Osso Jr., declared on the company's Thursday conference call following the release of results for the 2012 fiscal fourth quarter and full year ended Dec. 31.

In 2012, continued weaker natural gas prices forced the company to scramble to close the gap between energy revenues and planned expenditures by selling some of the vast treasure trove of assets it had accumulated over the previous several years, and it slid into the red on a full-year basis versus a year-earlier profit. The company lost $940 million, or $1.46 per diluted share, on the year, versus a 2011 profit of $1.57 billion, or $2.32 per share.

However, since then, Chesapeake has cut expenses, including a buyout of some higher-paid veteran employees, has cut back its exploration and production activities on less-profitable natural gas and concurrently ramped up its exploration and production of oil and natural gas liquids, both of which command a healthy premium in today's energy market. It projects a continuation of these trends in 2013, anticipating an 18% year-over-year rise in oil production and a 42% jump in liquids production, while regular dry natural gas production will fall by at least 7%.

Asset sales on tap

It has also slated more asset sales, including a pending deal for its properties in the Mississippi Lime energy field in northern Oklahoma.

During the question-and-answer portion of the conference call that followed the formal presentations by Dell'Osso and company chief operating officer Steven C. Dixon and remarks by Jeffrey L. Mobley, Chesapeake's senior vice president of investor relations and research, the CFO acknowledged the premise of an analyst's question that coming in at the low end of the estimated $4 billion to $7 billion of asset sales would allow Chesapeake to meet its capex needs, while hitting the top part of that range would also permit it to continue deleveraging by paying down debt.

Dell'Osso said that Chesapeake is "absolutely focused on getting the company deleveraged financially, and we're very intent on getting to investment-grade metrics, getting to a much stronger balance sheet." At the end of 2012, the company's balance sheet showed net debt of $12.3 billion, up from $10.2 billion at the end of 2011, and its ratio of net debt as a percentage of total capitalization had risen to 41% from 36% a year earlier. The year-end debt figure was well above the $9.5 billion target debt level the company had established several years ago.

Dell'Osso said that the $9.5 billion number it had picked several years ago is "still a pretty good number when you look at it from an investment-grade metrics standpoint. But we're two years more now from when we set that goal, and we'll always probably look at it on a pretty fluid basis. It could ultimately go lower than that, it could be a bit different, but in general, significant deleveraging is absolutely the plan and won't change."

Dell'Osso and Dixon declined to give any specifics on Chesapeake's pending efforts to sell the Mississippi Lime holdings and declined to speculate on any other potential asset divestitures. For instance, they parried a query from another analyst as to whether Chesapeake might consider selling assets in the Marcellus Shale natural gas field in Pennsylvania, Ohio and West Virginia in order to fund deleveraging.

When asked whether the company might tap its currently unused revolver to meet its costs should natural gas prices - recently starting to marginally improve - suddenly "surprise to the downside," the CFO pointed out that 72% of the company's output is hedged against such a drop, "so short-term impacts to commodity prices won't have the impact that it did have on us last year."

He reiterated that "we're very focused on deleveraging over time," saying that "we have a lot of levers we can pull" to meet the company's needs in the event of a larger-than-anticipated funding shortfall.

"We'll be focused on delivering on asset sales, be focused on staying within our budget and reducing our leverage."

The end of Aubrey

The conference call was notable because for the first time, Chesapeake founder and chief executive officer Aubrey K. McClendon - who had dominated the company's 80 previous conference calls over the last 24 years - was not involved.

McClendon came under fire from some shareholders and in the financial media last year on a variety of his decisions and activities. He is scheduled to leave the company on April 1. The board of directors is currently involved in searching for a replacement.

Dixon and Dell'Osso offered no specifics as to what direction that search might take.

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