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.
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