“Due to the combination of anticipated producing asset sales decreasing EBITDA, along with lower natural gas prices likely causing upcoming quarters' EBITDA to be below last year's counterparts, we believe the ratio has the potential to approach, if not exceed, 4x (the threshold) in the third or fourth quarter of this year,” the report states.
Chesapeake has previously disclosed in regulatory filings that too much debt could trigger a domino effect that could cause its revolving credit facility and “a significant portion of our senior notes indebtedness” to be “declared immediately due and payable.”
Chesapeake has said it plans to pay off much of the $4 billion loan by the end of the year with proceeds from its planned $9 billion to $11.5 billion in asset sales.
“Chesapeake is caught in a real squeeze right now,” said Steven Agee, dean of Oklahoma City University's Meinders School of Business. “These asset sales they're looking at are predicated upon certain thresholds being met for the price of natural gas. If those prices aren't sufficient to warrant the price they've talked about in terms of consummating the sale, the buyer is naturally going to be cautious because the prices are so low.”
The company said it will receive about $3.8 billion from the loan after paying fees, saying that with the loan, its cash on hand and the remaining balance on its revolving credit facility, it now has $4.7 billion available. Chesapeake has said it had $438 million in cash as of March 31.
“I don't think any of us recognized how precarious a position they were in until Friday,” said Jake Dollarhide, CEO of Longbow Asset Management Co. in Tulsa. “If they hadn't gotten the loan, I think the stock would have traded under $10 Monday on fears of financial worries.”
Even with the loan, Chesapeake's stock price has suffered, losing another 87 cents, or 5.6 percent on Tuesday to close at $14.65. The stock price recovered 11 cents, or less than 1 percent, in after-hours trading after Chesapeake said it increased the size of the most recent loan.
The company has said the loan will give it the cash flow and negotiating strength it needs to get the best prices for its planned asset sales.
“It gives them a really good chance,” Dollarhide said.