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Announcement:

Moody's changes Chesapeake Energy outlook to negative

Global Credit Research - 09 May 2012

Approximately $12 billion of rated debt affected

New York, May 09, 2012 -- Moody's Investors Service changed the rating outlook for Chesapeake Energy Corporation (Chesapeake) to negative from stable. Moody's also changed to negative from stable the rating outlooks for Chesapeake Midstream Partners, L.P. (CHKM) and Chesapeake Oilfield Operating, L.L.C. (COO). Chesapeake's, CHKM's and COO's Ba2 Corporate Family Ratings (CFR) and Ba3 senior unsecured ratings were affirmed. Chesapeake's Speculative Grade Liquidity Rating remains SGL-3. These rating actions follow Chesapeake's reported first quarter results that point to an even larger capital spending funding gap for 2012 caused primarily by lower natural gas prices but also by increased spending.

RATINGS RATIONALE

"The negative outlook reflects the escalating execution risk of Chesapeake's plan for funding its large capital spending budget, rising leverage metrics and accompanying liquidity concerns," commented Pete Speer, Moody's Vice President. "The company's already diminished cash flows are vulnerable to further declines in natural gas prices and it remains dependent on completing asset sales and other financing transactions with third parties to maintain adequate liquidity and fund its transition towards higher liquids production."

The recent disclosures related to the chief executive officer's personal financing transactions to fund his participation in the Founder Well Participation Program have raised conflict of interest questions and reflect poorly on Chesapeake's corporate governance. These issues further confirm our existing views regarding the CEO's dominant role at Chesapeake and his strong influence on the company's risk appetite and growth objectives. This influence is reflected in the company's aggressive financial policies and complicated structure which are incorporated into our ratings. However, if the resulting SEC inquiry, shareholder litigation or the audit committee's review of the CEO's personal financing transactions raises additional issues or adversely effects the company's execution of its funding strategy then there could be negative ratings implications.

Chesapeake's latest guidance is for capital spending to exceed operating cash flow in 2012 by around $10.5 billion, up from $8 billion in its February guidance. This funding gap could continue to rise if natural gas prices decline further, lowering the company's earnings and increasing its compliance risk with its bank credit facility debt covenants in the second half of 2012. Year to date Chesapeake has raised nearly $4 billion through a bond offering and planned monetization transactions. We view volumetric production payments (VPP) and the recent subsidiary preferred stock transactions as debt and therefore the company's debt (reflecting Moody's adjustments) has increased to approximately $23.6 billion at March 31, 2012 from $19.2 billion at the beginning of the year. Consequently, Debt/proved developed (PD) reserves and Debt/average daily production have increased to around $12.30/boe and $35,700/boe, respectively, at March 31, 2012.

"We are also concerned that the company's leverage metrics could remain elevated or continue to increase," said Speer. In order for Chesapeake to reverse this rise in leverage metrics and maintain adequate compliance headroom with its credit facility covenants it must execute its plan to meet most of its remaining funding needs through asset sales, reduce its reported debt and continue to grow its production volumes. If the company has to instead rely more heavily on debt funding then its leverage metrics could remain at levels inconsistent with its current ratings.

The affirmation of Chesapeake's Ba2 CFR is supported by its very large proved reserve and production scale, big acreage positions in multiple basins across the US, low operating costs and successful execution through the drillbit. The company is among the largest independent exploration and production companies rated by Moody's, with reserve and production scale comparable much higher rated investment grade E&Ps. Chesapeake has acreage positions in many oil and wet gas plays that are very attractive to both peers and financial investors and a strong track record of completing its planned monetization transactions.

Liquidity issues or further increases in leverage metrics could result in Chesapeake's ratings being downgraded. Debt/average daily production and Debt/PD reserves sustained above $35,000/boe and $12/boe and RCF/Debt below 20% could result in a ratings downgrade. The outlook could return to stable if the company completes its planned asset sales, reduces its leverage metrics and improves its liquidity. In order for the ratings to be upgraded Chesapeake's leverage metrics have to decline significantly and its liquidity will have to substantially improve and be less reliant on monetization transactions. Debt/average daily production, Debt/PD, and Retained Cash Flow (RCF)/Debt approaching $25,000/boe, $9/boe and 35% on a sustainable basis could result in a ratings upgrade to Ba1.

The outlooks for CHKM and COO were changed to negative because of their dependence on Chesapeake for a substantial majority of their revenues and Chesapeake's ownership interest in those entities. CHKM is a master limited partnership that primarily provides natural gas gathering services. Chesapeake owns 50% of CHKM's general partner and a sizable amount of its limited partner interests. COO is a wholly owned oilfield services subsidiary of Chesapeake.

The principal methodology used in rating Chesapeake was the Global Independent Exploration and Production Industry Methodology published in December 2011. The principal methodologies used in rating CHKM and COO were the Global Midstream Energy Industry Methodology published in December 2010 and the Global Oilfield Services Industry Methodology published in December 2009, respectively. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Moody's current ratings for Chesapeake Energy and its affiliates are:

Chesapeake Energy Corporation

Long Term Corporate Family Ratings (domestic currency) of Ba2

Probability of Default Rating of Ba2

Speculative Grade Liquidity Rating of SGL-3

Senior Unsecured (domestic currency) Rating of Ba3

Senior Unsecured (foreign currency) Rating of Ba3

Senior Unsecured Shelf (domestic currency) Rating of (P)Ba3

LGD Senior Unsecured (domestic currency) Assessment of 71 - LGD5

LGD Senior Unsecured (foreign currency) Assessment of 71 - LGD5

Chesapeake Energy Corporation is an independent exploration and production company based in Oklahoma City, Oklahoma.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following : parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Peter Speer
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's changes Chesapeake Energy outlook to negative
No Related Data.

 

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