Chesapeake Energy Corporation
(
CHK
) increased the size of the unsecured term loan from Goldman Sachs
Bank USA and affiliates of Jefferies Group, Inc to $4 billion from
$3 billion, for paying down its revolving credit line.
Chesapeake − the second largest U.S. gas producer after
ExxonMobil Corporation
(
XOM
) − faces a funding gap of $9 billion to $10 billion as natural gas
prices hit a 10-year low early this year. The new loan comes at an
initial interest rate of 8.5%, which could eventually exceed 11.5%
if the company fails to pay it off by the end of the year.
In first quarter 2012, Chesapeake paid $195 million in interest
expense. This amount could increase by $43 million over the next
three months with the addition of new loan and after paying down
the revolver, which takes 2.75% interest rate.
Meanwhile, ratings agency Standard & Poor's announced that
it has slashed Chesapeake's credit rating to "BB-" from "BB." This
is the second time that the agency downgraded its rating on
Chesapeake in recent months, highlighting concerns over the
company's ability to finance its operations due to a wider gap
between operating cash flow and capital expenditures.
This news hit Chesapeake's stock, with shares falling 5.6% to
$14.65 on Tuesday. This is the worst fall for Chesapeake shares in
more than three years.
Although Chesapeake plans to divest its assets in order to
bridge the funding gap, this program might be delayed to ensure
that terms and conditions set forth by its creditors are not
jeopardized. However, this new loan will enable the Oklahoma-based
company to pay off its debt as well as complete its asset sale
program. The proceeds from planned asset sales will be utilized to
repay the loan in full before the end of this year.
The addition of unsecured loan brings its liquidity to more than
$4.7 billion including unrestricted cash on hand and available
borrowing capacity under its revolving bank credit facilities.
Chesapeake is in the midst of a restructuring plan that intends
to reduce its long-term debt to $9.5 billion by the end of the year
through monetizing its assets and reducing in lease-hold spending,
while transforming from a natural gas-focused producer to a more
balanced liquids-focused producer.
Per the Zacks Consensus, Chesapeake's earnings per share for the
year 2012 and 2013 are estimated at $0.73 and $1.91, respectively.
This represents a decline of 73.9% in 2012 and a growth of 161.3%
in 2013.
Chesapeake holds a Zacks #3 Rank, which is equivalent to a Hold
rating for a period of one to three months. Longer term, we
maintain our Neutral recommendation on the stock.
CHESAPEAKE ENGY (CHK): Free Stock Analysis
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