NEW YORK: Chesapeake Energy is continuing to deleverage after years of heavy borrowing with plans to repurchase several of its outstanding bonds using the proceeds from recent asset sales.
The Oklahoma City-based natural gas giant had total debt outstanding of $12.5 billion at end December, according to a regulatory filing, making it one of the biggest high-yield issuers in the US
Much of that debt was taken on to fund an aggressive oil and gas property acquisition and capital expenditure program, which allowed it expand its oil and gas output.
Billionaire investor Carl Icahn displayed his confidence in the company in December, more than doubling his stake and saying the company was undervalued. A month later, Chesapeake announced a plan to cut its debt by 25 percent over the next two years by reducing spending on oil and gas properties and raising cash with asset sales.
Many on Wall Street believed the action was taken at Icahn's urging.
In February, Chesapeake Energy priced a $1 billion 10-year bullet senior notes issue at 6.125 percent, as part of a liability management program to extend and retire debt.
Chesapeake's Chief Executive Aubrey McClendon told Reuters last week that Icahn pushed already formed plans along by encouraging the company to pursue hard targets for debt reduction and growth.
"I think (Icahn) helped us to be more forceful in what we are going to do, to be more precise," McClendon said. "He and our other shareholders like numbers."
Last month Icahn lowered his stake in Chesapeake to 4.15 percent from 5.8 percent. Icahn owns about 27 million shares of Chesapeake that are valued at about $900 million based on Monday's New York Stock Exchange close of $33.83.
Chesapeake will release its first-quarter results on May 2. The company reported fourth-quarter earnings on February 22nd, posting earnings per share of $0.70, handily beating the Thomson Reuters consensus estimate of $0.63.
INCENTIVE TO TENDER?
A favored strategy of debt investors is to buy into names that have the potential of moving from high-yield, or "junk" status, to investment grade in the coming years. Chesapeake, rated Ba3 by Moody's and BB by Standard & Poor's, is one such candidate.
The Ba3 rating is three notches into junk status on Moody's scale, while the BB rating is two notches into junk on the S&P scale.
Chesapeake's debt currently stands on S&P's list for a potential upgrade, which the agency defines as issuers that have either a positive outlook or ratings on CreditWatch with positive implications across rating categories AA+ to B-.
The bonds have recently traded to reflect a potential upgrade, with the benchmark 9.50 percent notes due 2015 quoted in the 123-124 context over the last month versus 112 late last year.
Those same bondholders are now being taken out at 121, a two to three point loss. The bonds traded down on Tuesday to reflect the tender offer price.
"Bondholders would assume they can rest easy. Chesapeake has issued a ton of paper, refinanced a ton of debt, and claimed they are trying to achieve investment grade ratings, therefore things are stable and bond prices creep up. Now, here they come with the tender offer," said James Lee, senior analyst at Calvert Investments.
"It's very shrewd. The CEO is saying if our bonds are trading at 5.50 percent and 6 percent, then let's refinance everything. I really admire them. This is a kind of thing where moss does not grow on that stone. Chesapeake is constantly reassessing."
The company's potential rising star status is one reason why KDP Investment Advisors is urging investors to hold onto the notes.
"Given our expectation that Chesapeake will likely reach investment grade status in the near-term (most likely a late 2012 event), we believe investors are likely to realize greater upside once Chesapeake is upgraded by the agencies," said Ken Duffel, a credit analyst at KDP Investment Advisors.
"Thus, we do not recommend that investors tender for the notes."
The total consideration for the 9.50 percent senior notes due 2015 is in line with the current market price, and presents little incentive to tender other than avoiding the bid/ask spread, he said. The tender offer for the 6.625 percent senior notes due 2020 is at a slight premium to current trading levels.
Alongside rising interest rates, one risk of declining to tender is that investors could be left holding bonds that are less liquid. However, market participants expect the buy-back to be successful as those investors that bought bonds at much lower prices would still be locking in what for many will be substantial gains.
KDP anticipates that Chesapeake will reduce its debt by around $2.5 billion during the second quarter of 2011, and by a further $500 million in the third quarter.
Deutsche Bank, Citi and RBS are joint dealer managers for the tender offers, which will be funded with a portion of the roughly $5 billion of proceeds from the sale of its Fayetteville Shale assets to BHP Billiton Petroleum, which closed on March 31.
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