Chesapeake’s half-billion dollar tab spurs credit line concerns

Chesapeake Energy Corp.’s ability to pay off a half-billion dollars in debt next month hinges on how much of a $1.76 billion nest egg and $4 billion credit line has already been burned by the second-largest U.S. natural gas producer.

On Monday, uncertainty on those resources helped fuel the steepest one-day drop in the stock’s history. Chesapeake now becomes the latest shale driller punished by gluts of gas and crude that have rendered companies increasingly desperate to conserve cash.

The company probably finished 2015 with about $1 billion still in hand, said Spencer Cutter, a Bloomberg Intelligence analyst. What’s unclear is just how much of the credit line remains in place to help cover $500 million in debt due on March 15. The concern among some investors is that the oil and gas producer may run out of cash to cover debts in a prolonged market downturn, said Tim Rezvan, an analyst at Sterne Agee & Leach Inc.

“The lifeblood of this company for the next four quarters at least will be their revolving credit facility,” said Mark Hanson, an analyst at Morningstar Inc., in a telephone interview on Monday. Investors will also be paying close attention to whether lenders reduce Chesapeake’s borrowing base during the bi-annual reassessment in April, he said.

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The company, scheduled to report earnings Feb. 24, declined to comment. The Oklahoma-based natural gas producer is expected to post a second consecutive annual loss this year as an oversupply of North American gas weighs on prices and erodes cash flows it needs to cover costs, according to analysts’ estimates. Burdened with a total debt load seven times larger than its market value, Chesapeake has been canceling drilling projects, cutting jobs and closing offices to hold onto every dollar it can.

Chesapeake pumps more U.S. gas than any driller other than Exxon Mobil. It has $1.3 billion in debts maturing by the end of 2017, and analysts expect Chesapeake to have a cash shortfall of more than $1 billion over the next two years.

Chesapeake would be reluctant to pay out $500 million from its cash reserve “in this commodity environment when it needs every dollar of liquidity,” Brian Gibbons, a debt analyst at Creditsights Inc., said in a note to clients.

Chesapeake on Monday plunged 33 percent to $2.04, erasing $678 million in market value in one day. For activist investor Carl Icahn, the second-largest Chesapeake shareholder and driver of the 2013 investor revolt that deposed co-founder Aubrey McClendon, the drop resulted in a paper loss of about $75 million on the value of his holdings, assuming his stake hasn’t changed since the latest filing compiled by Bloomberg.

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The billionaire owned about 73 million shares as of Sept. 30. In December, Icahn told T. Boone Pickens during a podcast that he was “‘stuck” in some energy investments and that “it’s going to be tough for a while.” Icahn wasn’t immediately available to comment further, according to a spokesperson.

Chesapeake’s shares initially lost more than half their value after a Debtwire report that it had brought on restructuring attorneys from Kirkland & Ellis to help sort out its balance sheet. After the company issued a statement dismissing the report, the stock pared losses.

Chesapeake is not alone in fighting market fears over potential restructuring. Houston-based Halcon Resources Corp. said Monday it had “significant liquidity” after a report that it had retained the Weil, Gotschal law firm to explore bankruptcy. Even the industry’s biggest player, Exxon Mobil Corp., has been jolted; last week, Standard & Poor’s warned it may downgrade Exxon’s AAA credit rating for the first time since the Great Depression.