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08 Dec 1997
MOODY'S CONFIRMS SR. NOTES OF CHESAPEAKE ENERGY AT Ba3
New York, 12-08-97 -- Moody's Investors Service confirmed the Ba3 rating of Chesapeake Energy Corporation $550 million senior unsecured notes, concluding a rating review for potential downgrade announced on June 30, 1997.
The confirmation is based on the benefits that Chesapeake Energy should derive from the announced acquisition of three companies for a total of $573 million--DLB Oil and Gas Inc., AnSon Production Corporation, and Hugoton Energy Corporation to be principally financed with equity issuance. The longer reserve lives and combined proved reserves, output, and production prospects of these acquisitions should more than offset the company's disappointing results in the Louisiana Austin Chalk Trend field, which originally prompted Moody's review. The acquisitions will be funded with more equity than debt, thereby reducing the company's pro forma leverage.
The Ba3 rating, however, continues to reflect downsized potential from the company's high proportion of CAPEX allocated to the inconsistent Texas and Louisiana Austin Chalk areas, the Texas Chalk's relatively mature status, the Louisiana Chalk's very high individual well costs, and very steep decline curves. Of the $300 million capital expenditure budgeted for fiscal 1998, approximately $150 million is targeted for the Austin Chalk Trend area, where further disappointments could create more write-downs in the future.
Due to the Louisiana Austin Chalk Trend's high exploration failure rate and disappointing output from producing wells, the company took a $236 million pre-tax asset write-down for fiscal 1997, ended June 30. These developments also slowed reserve replacement, and followed several years in which the proportion of proved undeveloped reserves (PUD) to total proven reserves was very high.
But in October 1997, Chesapeake Energy announced the $193 million acquisition of DLB and AnSon, two Oklahoma City-based independent exploration and production companies that operate mainly in the Anadarko Basin in western Oklahoma. In November it announced the acquisition of Wichita-based Hugoton, which operates throughout the Mid-Continent area--for $380 million. Together, these three companies will bring to Chesapeake Energy new core areas in the Mid-Continent; and proven reserves of 477 billion cubic feet of natural gas equivalent (Bcfe) that will increase its proven reserve base by 118% (to 880 Bcfe). They will also lengthen its reserve life to eight from five years; and raise total production to 350 million cubic feet equivalent per day (Mmcfe/d) from 215 Mmcfe/d for fiscal 1997.
The three companies' proven reserves--68% of which is proved developed--have been historically evaluated by highly respected oil and gas reserves engineers. They total more than two and one-half times the 174 Bcfe of estimated reserves Chesapeake Energy wrote down in the Louisiana Austin Chalk Trend. They will increase the company's proved developed reserves to 65%, pro forma for the acquisitions, from 49% of total proved reserves at financial year ending June 30, 1997.
The DLB acquisition, which the company expects to close in early 1998, also includes nine gas gathering systems and a gas marketing subsidiary based in Houston, Texas, valued at approximately $10 million. The AnSon purchase, should close in December, includes undeveloped mineral interests and a gas marketing subsidiary based in Oklahoma City, valued at approximately $7 million. Chesapeake Energy expects to close the Hugoton acquisition in early 1998.
At September 30, 1997, the DLB, AnSon, and Hugoton reserves had a net present value of $140 million, $35 million, and $300 million, respectively, each with relatively low development risk. This should enable Chesapeake Energy, under reasonable pricing scenarios, to generate sufficient cash flow to reduce its debt, build retained earnings, and improve its balance sheet. Pro forma for the acquisitions, at financial year ending June 30, 1997, Chesapeake would have generated approximately $235 million in EBITDA and $190 million in cash flow.
Although Chesapeake Energy's cash balances are now some $200 million, due to the $74 million after-tax proceeds from the sale of its 4.2 million share investment in Bayard Drilling Technologies, Moody's notes that much of this cash will be needed to develop the 35% of proved reserves that are currently undeveloped. Most of these outlays are targeted for the Austin Chalk.
Chesapeake Energy will fund the DLB acquisition through the issuance of $65 million of common stock and the assumption of $85 million of DLB's commercial paper and bank debt; and the AnSon acquisition through the issuance of $43 million of common stock. All of Hugoton's 20.9 million fully-diluted outstanding shares will be exchanged for 1.3 shares of Chesapeake Energy's shares (an approximate value of $275 million) and, additionally, $105 million of Hugoton's debt will be assumed by Chesapeake Energy. Since the $383 million of total new equity issued by Chesapeake Energy for the three transactions more than offsets the $190 million of total assumed debt, Chesapeake Energy's financial leverage, although still high, will improve to 51% from 64%, pro forma for the financial year ending June 30, 1997. Although Moody's still rates the company's $47.5 million of 12% senior secured note at Ba3, the issue has been legally defeased and removed from the company's balance sheet. The company also states that, as of March 1, 1998, the issue will be called and redeemed by the trustee from the defeasance funds.
Chesapeake Energy Corporation, headquartered in Oklahoma City, Oklahoma, explores for and develops gas and oil reserves, primarily in South Texas, Oklahoma, and Louisiana.
No Related Data.
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