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Rating Action:

Moody's changes Chesapeake Energy outlook to stable

Global Credit Research - 04 Jun 2013

Approximately $12 billion of rated debt affected

New York, June 04, 2013 -- Moody's Investors Service changed Chesapeake Energy Corporation's (Chesapeake) rating outlook to stable from negative and affirmed the company's Ba2 Corporate Family Rating (CFR) and Ba3 senior unsecured debt ratings. The company's Speculative Grade Liquidity was also affirmed at SGL-3.

"The stable outlook reflects Moody's expectation that Chesapeake will be able to improve its leverage metrics this year and in 2014 through a combination of reserve and production growth and debt reduction," commented Pete Speer, Moody's Vice President. "The company has made significant progress in reducing its capital spending, hedging its natural gas exposure and increasing its available liquidity."

Issuer: Chesapeake Energy Corporation

..Outlook Actions:

....Outlook, Changed To Stable From Negative

..Affirmations:

....Corporate Family Rating, Affirmed Ba2

....Probability of Default Rating, Affirmed Ba2-PD

....Senior Unsecured Term Loan, Affirmed Ba3

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba3

....Senior Unsecured Conv./Exch. Bond/Debenture, Affirmed Ba3

....Senior Unsecured Shelf, Affirmed (P)Ba3

....Speculative Grade Liquidity, SGL-3

RATINGS RATIONALE

Chesapeake's Ba2 CFR incorporates the benefits of its very large proved reserve and production scale, sizable high quality acreage positions in multiple basins across the US, low operating costs and competitive drillbit finding and development (F&D) costs. These credit strengths are offset by the company's high adjusted debt and structural complexity resulting from a long history of rapid growth through acreage acquisitions and capital spending greatly in excess of cash flows. While Chesapeake still relies on asset sales to fund its capital spending in excess of operating cash flow, this funding gap has been reduced significantly in 2013 and 2014. The company appears to have sufficient financial flexibility to continue growing its oil production while completing enough asset sales over time to reduce debt and financial leverage.

The company's corporate governance improvements and senior management changes have yielded greater capital and financial discipline in 2013. Chesapeake appears committed to harvesting oil and, to a lesser extent, natural gas liquids production growth from its existing asset base while divesting of non-core assets to fill its funding gap and ultimately reduce debt. However, the asset sales have tended to take longer to close than initially expected. Consequently, Chesapeake's debt levels increased during the first quarter of 2013 causing its leverage on proved developed (PD) reserves (Debt/PD) to rise to nearly $14/boe and its cash flow coverage of debt (retained cash flow (RCF)/Debt) to remain weak at 16%.

Chesapeake's cash flow in 2013 will be much stronger than last year because of its increased oil production volumes and higher natural gas prices. The company has significantly hedged its oil and natural gas production to lock in the higher cash flow. Moody's expects Chesapeake's Debt/PD to decline towards $12/boe over the remainder of 2013 through a combination of reserves growth and debt reduction through asset sales. The company's RCF/Debt should near 20% for 2013 and both leverage metrics should continue to improve in 2014, supporting the stable outlook.

Moody's expects Chesapeake to maintain adequate liquidity into 2014, consistent with its SGL-3 rating. The company had $3.1 billion of available borrowing capacity on its corporate revolver at March 31, 2013 and approximately $1.4 billion of asset sales under contract at May 8, 2013. The proceeds from contracted asset sales and revolver availability should be sufficient to fund anticipated capital expenditures in excess of operating cash flows into 2014. The company's hedged cash flows should result in good headroom for compliance with revolver covenants through the first quarter of 2014. Chesapeake will need to complete further asset sales to achieve any debt reduction and maintain ample revolver availability as the year progresses.

If Chesapeake is not able to reduce its adjusted debt and corresponding leverage metrics as expected then its ratings could be downgraded. Debt/PD reserves above $12/boe, RCF/Debt below 20% or Debt/Average Daily Production above $35,000/boe on a sustained basis could result in a ratings downgrade. A ratings upgrade appears unlikely in 2013. In order for the ratings to be upgraded to Ba1, Chesapeake's leverage metrics have to improve much more than expected and its liquidity will have to strengthen further and be much less reliant on asset sales. Debt/PD, Retained Cash Flow (RCF)/Debt and Debt/Average Daily Production approaching $9/boe, 35% and $25,000/boe on a sustainable basis could result in a ratings upgrade to Ba1.

The Ba3 ratings on the company's senior unsecured notes and term loan reflects both the overall probability of default of Chesapeake, to which Moody's assigns a PDR of Ba2-PD, and a loss given default of LGD 4 (62%, changed from 69%). Chesapeake has a $4 billion senior secured revolving credit facility. The size of the potential priority claim to the assets relative to the senior unsecured debt outstanding results in the unsecured debt being rated one notch beneath the Ba2 CFR under Moody's Loss Given Default Methodology.

The principal methodology used in this rating was the Global Independent Exploration and Production Industry published in December 2011. 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.

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

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit 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 stable
No Related Data.

 

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