S&P Downgrades Chesapeake’s Credit Rating

NEW YORK — Standard & Poor’s Ratings Services has lowered its corporate credit rating on Chesapeake Energy Corp. to B from BB-. The outlook is negative, the agency said.

“We have reassessed Chesapeake’s business risk and have revised our assessment lower to fair from satisfactory, said Standard & Poor’s credit analyst Paul Harvey. “We expect profitability to continue to suffer due to low natural gas and crude oil prices, compounded by very high costs related to its gathering and processing contracts,” he added.

The ratings downgrades were announced Dec. 22.

S&P also removed the senior unsecured debt rating from CreditWatch with negative implications and lowered it to CCC+ from ‘BB-‘ and revised the recovery rating to 6 from 4. The 6 recovery rating indicates S&P’s expectation for negligible recovery (0% to 10%). In addition, S&P lowered the rating on the company’s senior secured debt to BB- from BB+. The recovery rating on the secured debt remains 1, indicating expectation for very high recovery (90%-100%). And the agency lowered its rating on the company’s preferred stock to CCC from B-.

S&P said downgrade reflects its assessment of the risk that the current market conditions could make it more difficult to make large asset sales on favorable terms. Asset sales are an important contributor to available cash to support long-term liquidity. Although based on preliminary results of Chesapeake’s exchange offer, outstanding debt should fall by about $1.5 billion, and S&P’s financial risk profile assessment remains highly leveraged. Moreover, the tendered offer failed to significantly ease the upcoming need to address about $2.5 billion of debt maturities or puts through 2017.

Explained the agency in its report, “We assess Chesapeake’s business risk profile as fair. We consider Chesapeake’s financial risk profile to remain highly leveraged, pro forma for the company’s exchange offer. We currently assess Chesapeake’s liquidity as adequate. The negative outlook reflects our expectation that liquidity could significantly weaken during the next 12 months due to high negative free cash flows and potential negative borrowing base redeterminations. Chesapeake will face challenging industry conditions exacerbated by its high debt levels. Additionally, given uncertainty in natural gas and crude oil prices combined with weaker capital markets for the sector, we believe achieving large asset sales will be challenging. Finally, we expect financial measures to remain weak despite the expected reduction in debt following Chesapeake’s recent exchange offer.”

Pictured: Chesapeake Energy Corp.’s headquarters in Oklahoma City.

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