Chesapeake Energy Corp., the second-biggest U.S. natural gas producer with operations in Ohio, is seeking as much as $12 billion from asset sales and joint ventures to cope with a cash crunch amid rising debt and tumbling gas prices.
The company expects to get $10 billion to $12 billion from transactions such as the potential sale of all of its oil and gas fields in the Permian Basin of Texas and New Mexico, Chesapeake said Monday.
The company did not address Ohio, but it has said it intends to pursue drilling in Ohio’s Utica shale because the formation also provides lucrative wet gases, such as propane, ethane and butane, not just natural gas.
The Oklahoma City-based company expects to receive about $2 billion in the next 60 days from two transactions involving advance sales of output in Texas and Oklahoma.
The deals will help Chesapeake reduce a net debt load that is twice the size of Exxon Mobil Corp., a company with a market value 27 times larger.
Chesapeake Chairman and Chief Executive Aubrey McClendon is facing a $3.5 billion gap this year between cash flow and drilling costs, according to analyst Raymond James & Associates Inc. Mc- Clendon, who has been seeking an investment-grade rating since at least 2009, has vowed to cut long-term debt 25 percent by year end.
“This is exactly what Chesapeake had to do given the pretty big cash flow-to-spending gap they are facing,” said Kevin Cabla, an analyst at Raymond James in Houston. Selling more shares to bridge the financing gap “would have crushed the stock even more than it has been.”
Chesapeake shares are down about 28 percent from a year ago.
Chesapeake and rival explorers such as ConocoPhillips have been curtailing gas production after an expanding glut of North American supplies drove prices last month to the lowest in a decade. Chesapeake is among the most sensitive producers to falling gas prices. With every 25-cent decline in the price of a thousand cubic feet of gas, the company’s cash flow is reduced by 5.4 percent, Brian Gibbons, a credit analyst at CreditSights, said in a Feb. 7 note to clients.
Chesapeake’s capital spending has exceeded cash from operations in every quarter since October 2003, according to data compiled by Bloomberg News. During the third quarter of 2011, as U.S. gas futures were tumbling 16 percent, Chesapeake swelled its net debt by 18 percent to $11.678 billion.
“This move is clearly in response to pressures exerted by weak natural gas prices, its high leverage and high spending plans,” Scott Hanold, a Minneapolis analyst for RBC Capital Markets, wrote Monday in a note to clients. Hanold’s model foresees a $4 billion funding gap for 2012.
Gas dipped to a 10-year low of $2.231 per million British thermal units on Jan. 23. Gas for March delivery fell 2 percent to $2.427 per million British thermal units in Monday trading, a 38 percent drop in a year.
The company said its 2012 financial plan aims to “fully fund” its planned spending for the year and provide additional liquidity for next year.
In the next two months, Chesapeake will receive an up-front payment for future production in the Texas Granite Wash formation. Chesapeake didn’t say who the buyer would be.
The company also plans to sell stakes in a new subsidiary that will hold assets in the Cleveland and Tonkawa deposits in Oklahoma. The transaction would be “similar” to an agreement announced in November, when private investors bought shares in a Chesapeake subsidiary that holds Utica shale acreage.
Chesapeake said that later in the year, it could raise as much as $8 billion from transactions in the Mississippi Lime and Permian Basin, where it also is seeking joint-venture partners. Chesapeake holds the rights to drill on 1.8 million net acres in the Mississippi Lime, which spans northern Oklahoma and southern Kansas.
For the Permian Basin, where Chesapeake holds 1.5 million net acres, the company said it might consider selling all of the assets “if it receives a compelling offer.”
Chesapeake ought to fetch top dollar for its Permian assets because they are about 80 percent oil at a time when crude is averaging $100 a barrel, Cabla said.
“With oil prices at these levels, this is probably the best time to be getting out of the Permian,” Cabla said. “The Permian is one of the hottest regions right now” for acquisitions.
In September 2002, Mc-Clendon said the company would leave the Permian, drilling instead in lower-cost fields in the Midwest. Fifteen months later, Chesapeake changed course with a $420 million acquisition including wells in the Permian from closely held Concho Resources Inc.
Chesapeake plans to raise another $2 billion selling pipelines and gas-processing plants, oilfield services and miscellaneous investments, according to the company’s statement.
Separately, Chesapeake said it will sell $1 billion of senior notes due in 2019 and use the proceeds to pay bank credit.
Exxon Mobil, based in Irving, Texas, is the largest U.S. gas producer.
Beacon Journal staff writer Bob Downing contributed to this report.
