Chesapeake's Half-Billion Dollar Tab Spurs Credit Line Concerns

(Bloomberg) -- Chesapeake Energy Corp.’s ability to pay off a half-billion dollars in debt next month hinges on how much of a $1.76 billion nest egg and $4 billion credit line has already been burned by the second-largest U.S. natural gas producer.

On Monday, uncertainty on those resources helped fuel the steepest one-day drop in the stock’s history. Chesapeake now becomes the latest shale driller punished by gluts of gas and crude that have rendered companies increasingly desperate to conserve cash.

The company probably finished 2015 with about $1 billion still in hand, said Spencer Cutter, a Bloomberg Intelligence analyst. What’s unclear is just how much of the credit line remains in place to help cover $500 million in debt due on March 15. The concern among some investors is that the oil and gas producer may run out of cash to cover debts in a prolonged market downturn, said Tim Rezvan, an analyst at Sterne Agee & Leach Inc.

“The lifeblood of this company for the next four quarters at least will be their revolving credit facility,” Mark Hanson, an analyst at Morningstar Inc., said in a telephone interview on Monday. Investors will also be paying close attention to whether lenders reduce Chesapeake’s borrowing base during the bi-annual reassessment in April, he said.

Annual Loss

The company, scheduled to report earnings Feb. 24, declined to comment. The Oklahoma-based gas producer is expected to post a second consecutive annual loss this year as an oversupply of North American gas weighs on prices and erodes cash flows it needs to cover costs, according to analysts’ estimates. Burdened with a total debt load seven times larger than its market value, Chesapeake has been canceling drilling projects, cutting jobs and closing offices to hold onto every dollar it can. 

Chesapeake’s exclusion of the $500 million in notes from a debt exchange that extended the payouts for some bonds signals that the company intends to pay up next month, Cutter and fellow BI analyst Julia Winters said in a note to clients on Tuesday.

Chesapeake pumps more U.S. gas than any driller other than Exxon Mobil Corp. It has $1.3 billion in debts maturing by the end of 2017, and analysts expect Chesapeake to have a cash shortfall of more than $1 billion over the next two years.