Chesapeake Energy Asset Sales Could Breach Bank Debt Rules

In first quarter earnings the oil and gas giant reported a top and bottom line miss. Meanwhile, Chesapeake Energy's spending guidance rose while its cash flow guidance declined, as a decade-low natural gas pricing continues to heighten its liquidity risk. The company's all-important liquids production guidance decreased while its natural gas production guidance went up.

During the 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.

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

"The negative outlook reflects the escalating execution risk of Chesapeake's plan for funding its large capital spending budget, rising leverage metrics and accompanying liquidity concerns," Pete Speer, Moody's vice president, said in the statement.

CEO McClendon said that it needs gas prices to rise to $5 a thousand cubic feet by 2014 from present levels near $2 if it were to meet its goal of having $7 billion in cash. In a meantime, the company will look to sell $20 billion in assets to pay down debts and repair its finances.

Fitch Ratings recently estimated that by selling oilfields and future production from some wells, and negotiating joint-venture's, Chesapeake Energy's could reach $10 billion in asset sales this year.

Friday's proxy statement cast those asset sale plans into doubt, pushing shares nearly 14% lower in late trading and Chesapeake's year-to-date share losses at nearly over 33%.

Southeastern Asset Management, Chesapeake's largest shareholder, recently wrote in letters to CEO Aubrey McClendon that the company should consider sale offers and push forward with its asset divestiture program.