Chesapeake's Credit Takes Another Hit

Chesapeake Energy (CHK) Corp.’s Sahara natural gas field in Oklahoma in producing less than expected, undermining fuel sales backing $880 million in loans and notes.

Output from 3,300 Chesapeake-operated wells in the Sahara field was 12 percent below projections during the six-month period ending in February, Moody’s Investors Service said in a note to clients yesterday. As a result, the so-called production coverage ratio on the Glenn Pool Oil & Gas Trust five-year loan and 10-year notes declined to 1.18 from 1.29, the credit-rating firm said.

Chesapeake, the second-largest U.S. gas producer, borrowed $880 million from Barclays Plc (BARC) in May 2011 under a pair of agreements that repay the loans with future supplies of gas, crude oil and gas byproducts.

It’s the second time in three months that deteriorating production has triggered alarm bells at the credit agency. In December, Moody’s downgraded ratings on $360 million in Chesapeake borrowings backed by wells in the Barnett Shale formation in Texas. Chesapeake’s production growth slowed to 3.4 percent in 2013 after growing at double-digit rates in 11 of the prior 12 years, according to data compiled by Bloomberg.

Chief Executive Officer Doug Lawler, appointed last year after co-founder Aubrey McClendon was fired, has been shifting investment and drilling rigs to higher-profit oilfields after a glut of North American gas collapsed prices and forced the Oklahoma City-based company to sell billions of dollars in assets to avoid a cash crunch.

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Moody’s placed under review for downgrade the Glenn Pool Oil & Gas Trust I senior secured loan maturing in May 2016 and the Glenn Pool Oil & Gas Trust II senior secured 10-year notes. The loan and notes are rated Baa2 and Baa3, respectively, by New York-based Moody’s.

Gordon Pennoyer, a Chesapeake spokesman, didn’t immediately return telephone message seeking comment.

The stock fell 0.2 percent to $25.17 at 11:25 a.m. in New York. Chesapeake has declined 7.2 percent this year.

Volumetric production payments, or VPPs, were a favorite financing device of McClendon and Chief Financial Officer Domenic Dell’Osso, one of the few high-level executive holdovers from the McClendon era. The company, which outspent cash flow in 21 of the past 23 years, had nine outstanding VPPs at the end of last year that raised $6.03 billion for the company, according to a U.S. Securities and Exchange Commission filing.

Dell’Osso characterized the Glenn Pool VPP as “another great transaction,” during a May 2011 conference call with analysts and investors.

Moody’s downgraded ratings on three classes of loans backed by output from Chesapeake wells in the Barnett Shale gas formation in north Texas in December, citing gas production that was 11 percent below projections. The six-month average coverage ratio was 1.1 at the time, compared with a projected ratio of 1.28, Moody’s said in a note on Dec. 17.

Exxon Mobil Corp. is the biggest U.S. gas producer, according to the Natural Gas Supply Association.

Credited to Joe Carroll, March 26, 2014