Chesapeake Energy Corp. (CHK), the second-largest U.S. natural-gas producer, seeks to fill the funding gap for its 2012 expenditure that resulted from the low natural gas prices, through divestitures. The company plans to raise as much as $10 billion to $12 billion from assets sales and joint ventures to cope with the mounting debt level and sinking gas prices.
Chesapeake, like its peer ConocoPhillips (COP), has been keeping gas production under check in response to the weak natural gas prices. Gas prices plummeted to a 10-year low of $2.231 per million British thermal units on January 23, 2012.
Consequently, last week, Chesapeake announced the curtailment of its daily gas production by 500 million cubic feet. The company plans to double that amount to cut its spending.
The decade-low natural gas price forced the company to take on cash-raising activities that include joint venture transactions in its Mississippi Lime and Permian Basin fields, a $2 billion midstream disinvestment program, as well as debt issuance.
Chesapeake expects to receive $6-$8 billion this year from the monetization of its assets for its West Texas Permian Basin and Mississippi Lime acreage in northern Oklahoma. The company expects the deal to close by the end of the third quarter of the current fiscal year.
Chesapeake’s 1.8 million net acres of Mississippi Lime ranges from northern Oklahoma to southern Kansas. In the Permian Basin, the company holds 1.5 million net acres and hopes to divest the entire property on getting a convincing bid.
The company also intends to sell some of its pipeline and storage properties to generate approximately additional $2 billion. Additionally, Chesapeake intends to issue $1 billion in bonds that mature in 2019, and likely to assist short-term debt. The company expects to pull down its debt level to $9.5 billion by the end of 2012.
As is the case with other independent exploration and production companies, Chesapeake’s results are directly exposed to oil and gas prices, which are inherently volatile and subject to complex market forces. Realized prices could differ significantly from our estimates, thereby affecting the company’s revenues, earnings and cash flows.
Though the company’s ongoing asset monetization initiatives are on track, we believe Chesapeake’s balance sheet is still more leveraged than its peer group. At the end of the third quarter, debt balance stood at $11.8 billion, representing a debt-to-capitalization ratio of 41.9% (versus 39.4% in the preceding quarter). Hence, we prefer stay at Neutral for the long term. The company also holds a Zacks #3 Rank, which translates to a short-term Hold rating.
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