Chesapeake Energy, the second largest producer of natural gas, recently announced a financial plan that includes raising about $10 to $12 billion, a figure "substantially in excess" of cash flow and planned expenditures.
Oklahoma-based Chesapeake Energy has a substantial presence in West Virginia. According to a news release from the company, rapidly increasing natural gas liquids production will enable the company to level its operational cash flow and its capital expenditures.
Most of the oil and gas assets being sold by Chesapeake are in Texas, Mexico and Oklahoma.
Chesapeake's release prompted Moody's, an investment analyst service, to change the company's outlook from stable to positive.
"Changing the rating outlook to stable from positive reflects the adverse effect of weak natural gas prices on Chesapeake Energy's operating cash flows," said Pete Speer, Moody's vice president. "The company's capital expenditure plans far exceed its cash flows, necessitating the execution of continued asset sales and capital raising transactions in 2012."
Christopher Helman, a staff writer for Forbes magazine primarily covering the energy industry, attributed Chesapeake CEO Aubrey McClendon's "financial engineering" genius for Chesapeake's success so far, but expressed doubt as to whether even he can continue to power through low natural gas prices.
"For years he has driven Chesapeake hard and fast to gobble up oil and gas acreage across the country," Helman wrote. "To keep his land machine running, McClendon has continuously raised more cash from joint ventures, spin offs and by issuing debt. This wouldn't have been a problem if gas prices just cooperated by staying around $5 or $6 per thousand cubic feet. Yet Chesapeake and other drillers have found so much new gas that what used to look like a bonanza has now turned into a glut."
The company announced a reduction in gas production last week. Chesapeake detailed its financial plan in a Monday news release.
"First, Chesapeake anticipates receiving total proceeds in the next 60 days of approximately $2 billion in two separate transactions," a release from the company states.
Those transactions include completion of a "volumetric production payment on its Texas Panhandle Granite Wash assets" and formation of a unrestricted subsidiary formed to hold Chesapeake assets in Ellis and Roger Mills counties in Oklahoma, in Cleveland and the Tonkawa gas plays.
The release says the company is also pursuing joint venture transactions in the Mississippi Lime and Permian Basin where Chesapeake owns a total of more than 3 million net acres of leasehold combined in both plays. In the same announcement, Chesapeake announced interest in a 100 percent sale of Permian Basin assets if a "compelling offer" is made.
Chesapeake holds the sixth largest holding position in the Permian Basin, and it represents about 5 percent of Chesapeake's proved reserves and current production.
Those transactions combined and other "minor asset sales," Chesapeake estimates, would result in $6 billion to $8 billion in cash proceeds for 2012. The company aims to complete those transactions by the third quarter.
Total monetization cash proceeds in 2012, Chesapeake estimates, will be between $10 billion to $12 billion.
"These proceeds are substantially in excess of the difference between the company's expected cash flow from operations and its planned capital expenditures and would allow the company to achieve its previously announced debt reduction goals while providing additional financial strength during this current period of low U.S. natural gas prices," the release states.
The company also plans to issue $1 billion of senior notes due 2019 in a public offering. The proceeds, the release states, will refinance maturities coming due earlier and for general corporate purposes.
"Chesapeake affirms its goal to reduce its long-term debt to no more than $9.5 billion at December 31, 2012, and anticipates achieving investment grade metrics of net long-term debt per thousand cubic feet of natural gas equivalent proved reserves of less than $0.50 and net long-term debt to total capitalization of less than 35% by year-end 2012," the release states. "
Updated production and capital expenditure forecasts are expected with Chesapeake's release of annual and quarterly financial data Feb. 21.
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