Moody's Changes Chesapeake Outlook on Funding Risk

Moody's Investor Service on Wednesday changed its rating outlook for Chesapeake Energy Corporation and for its subsidiaries Chesapeake Midstream Partners and Chesapeake Oilfield Operating to negative from stable over concerns about the company's plans for funding its large capital spending budget and diminished cash flows.

The Wall Street Journal reported Thursday that Chesapeake had saddled itself with about $1.4 billion of previously unreported liabilities over the next 10 years through off-balance sheet financial deals.

"The company's already diminished cash flows are vulnerable to further declines in natural gas prices and it remains dependent on completing asset sales and other financing transactions with third parties to maintain adequate liquidity and fund its transition towards higher liquids production," said Peter Speer, vice president and senior credit officer for Moody's Corporate Finance Group in a statement.

Recent disclosures related to Chief Executive Officer Aubrey McClendon's personal financial transactions to fund his participation in the Founder Well Participation Program have raised conflict of interest questions and reflect poorly on Chesapeake's corporate governance. The Wall Street Journal reported Friday that McClendon has received $108 million for his minority stakes in wells the company has sold.

"These issues further confirm our existing views regarding the CEO's dominant role at Chesapeake and his strong influence on the company's risk appetite and growth objectives," said Speer. "This influence is reflected in the company's aggressive financial policies and complicated structure which are incorporated into our ratings.

"However, if the resulting SEC inquiry, shareholder litigation or the audit committee's review of the CEO's personal financing transactions raises additional issues or adversely effects the company's execution of its funding strategy, then there could be negative ratings implications," Speer said.

The funding gap between Chesapeake's latest guidance for capital spending to exceed operating cash flow in 2012 by around $10.5 billion, up from $8 billion in February, could continue to grow if natural gas prices decline further, lowering the company's earnings and increasing its compliance risk with its bank credit facility debt covenants in the second half of this year.

So far this year, Chesapeake has raised nearly $4 billion through a bond offering and planned monetization transactions. Moody's said it viewed volumetric production payments and the recent subsidiary preferred stock transactions as debt. Reflecting Moody's adjustments, the company's debt has grown to approximately $23.6 billion as of March 31, 2012 from $19.2 billion at the beginning of 2012.

Karen Boman has more than 10 years of experience covering the upstream oil and gas sector. Email Karen at


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Jay Beigh | May. 13, 2012
I am not surprised at all. We were paying $5 to $15 per acre for leases on a gas play a few years ago, and Chessy and Devon came in and "blew" everyone out of the water at $75.00 to $90 per acre. Too much cash in the system, bubbles abound, bad decision making... lethal combo of all of the above....

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