Chesapeake Energy Corp. shares tumbled almost 8 percent Friday after the company said its planned asset sales likely will be completed in the first quarter of 2013 instead of by the end of 2012 as the company has previously announced.
“We remain absolutely committed to reducing our net long-term debt to no more than $9.5 billion,” said Domenic J. Dell'Osso Jr., Chesapeake's executive vice president and chief financial officer, during an analyst conference call Friday morning. “And if not achieved by Dec. 31, 2012, we expect to accomplish this No. 1 goal in early 2013.”
Chesapeake had long-term debt of $15.75 billion as of Sept. 30, according to regulatory filings.
The company's shares closed at $18.49, down $1.58, or 7.9 percent.
The company is still on target to sell a total of $17 billion to $19 billion in assets by the end of 2013, CEO Aubrey McClendon said.
Friday's discussion comes just one day after Chesapeake announced a $2 billion loan that will replace the $1.2 billion balance from an expensive $4 billion term loan the company received in May.
“When you step back and think about the assets they have for sale, there's a pretty good chance they will be able to execute on that,” said Scott Hanold, an analyst with RBC Capital Markets in Austin. “The $4 billion loan had provisions that changed at the end of the year. Obviously those conditions hurt Chesapeake's negotiations as a buyer. The new loan will provide them flexibility so they don't have to feel as under the gun.”
Moody's Investor Service on Friday assigned a Ba3 rating with a negative outlook to Chesapeake's newest loan. The rating is three notches below investment-grade status.
“The $2 billion term loan improves Chesapeake's liquidity as it works toward completing its planned asset sales,” said Pete Speer, Moody's vice president. “However, this new term loan also indicates that the asset sales are taking longer than initially expected to close and that expected debt reduction is sliding further into the future.”
Moody's also assigned the loan a negative outlook “based on Chesapeake's high leverage metrics and the execution risk of its plan to arrest its still heavy capital spending while also reducing reported debt to $9.5 billion through asset sales,” Moody's said in a statement. “While the company has made meaningful progress in boosting its oil production, it remains exposed to natural gas prices in 2013 which have strengthened recently but are still relatively week.”
Chesapeake's average daily production climbed 24 percent year-over-year and 9 percent from the previous quarter. Oil production jumped 96 percent year-over-year and 21 percent from the second quarter.
“We believe it's very important for our investors to recognize that Chesapeake's liquids growth story is primarily an oil production growth story more than an NGL (natural gas liquids) growth story,” McClendon said. “Obviously, not all liquids are made alike and so we are certainly focused on increasing oil production more than NGL production.”
Crude oil now represents about 14 percent of Chesapeake's total production, up from 9 percent one year ago.
Argus analyst Philip Weiss was pleased with Chesapeake's oil results.
“Oil production seems to be growing nicely — in line to very slightly ahead of my expectations,” Weiss said.
McClendon also said natural gas prices are likely to increase faster than most industry observers have predicted. Seven months ago, the country's natural gas storage held 900 billion cubic feet more than it did one year before, largely because of a warmer-than-normal winter combined with increased natural gas production.
That surplus is now down to 120 billion cubic feet.
“We believe the small remaining storage overhang should soon go into a year-over-year deficit, which is a quite remarkable turn of events from this past spring,” McClendon said.
McClendon attributed the storage drop to Chesapeake and other natural gas producers switching their focus to oil production while electric utilities began burning more natural gas and less coal.
“After battling natural gas headwinds, driven by relentless supply growth for the past four years, we now expect to enjoy a multiyear rebound in natural gas prices driven by demand growth that is likely to be equally relentless,” McClendon said. “This move from a multiyear trend of natural gas headwinds to a multiyear period of natural gas tail winds will have many positive implications for Chesapeake and its investors.”
Hanold said he generally agrees with McClendon's natural gas price forecast.
“They've always had somewhat of a bullish bias to natural gas. They have a pretty significant position in gas plays. That makes them a little bit biased,” Hanold said.
“But I don't think they're overly aggressive. You're seeing Chesapeake and others focus less on natural gas. With that coupled with the demand side, the data supports everything he (McClendon) is saying.”
Other analysts are not as convinced.
“It seems to me like he (McClendon) is betting heavily on a cold winter,” Weiss said. “Seasonal forecasts before the season starts do not have a good track record. Long-term, I do expect natural gas prices to be higher. I'm just not as confident it will happen as fast as Aubrey stated today.”