Chesapeake Energy Singing the Same Tune Amid Skepticism

A slew of Monday analyst downgrades keyed in on details in the 10Q filing and showed less confidence in McClendon's long-time ability to keep the banks at bay and raise cash in deals. JPMorgan cut its price target to $10 from $15, citing a possible delay to its planned Eagle Ford VPP sale. "We think Chesapeake still is not particularly cheap relative to other E&Ps and is in a difficult financial position," wrote Joseph Allman. Tudor Pickering cut its outlook on shares to "hold" from "accumulate," while UBS cut Chesapeake's price target to $16 from $20 and Stifel Nicolaus cut its share outlook to $25 from $29.

Chesapeake's largest shareholder, Southeastern Asset Management, which has recently become more vocal about the company's issues, cited the looming VPP as one reason to not panic about the company's ability to make ends meet and return value to shareholders.

In a letter to McClendon, Hawkins changed his shareholder status to "activist" but said he was optimistic about Chesapeake's asset divestiture plans. "We applaud current management efforts to do an Eagle Ford VPP, sell the Permian assets and do a Mississippi Lime JV at a time of good oil prices."

Oil and gas company debt agreements are typically based on a ratio involving balance sheet strength and proven reserve levels. Chesapeake's cash flow and proven reserve levels are facing two headwinds: (1) any asset sales that lead to lower levels of cash flow from producing assets and lower level of proven reserves; (2) the low natural gas pricing environment. Chesapeake suggested on the call that proven reserves aren't an issue because natural gas assets being impaired due to the uneconomic environment for drilling are "non-cash" charges. However, the hit to cash flow and EBITDA as a result of low-priced natural gas would be compounded by asset sales and that could cause bank debt issues.

During the most current quarter, Chesapeake reported that the combination of high spending and reduced cash flow as a result of low natural gas prices required that it to increase long-term debt, net of unrestricted cash, by approximately $2.4 billion to $12.6 billion to fund spending, while cash available declined to $2.4 billion from $3.1 billion. Bloomberg calculates that Chesapeake has outspent cash flow in 19 of the past 21 years.

Last Wednesday, Moody's downgraded Chesapeake Energy's rating outlook from stable to negative, citing funding gap and the impact of CEO Aubrey McClendon.