A reinvented Chesapeake Energy is starting to hit its stride. A year to the day after replacing profligate Chief Executive Aubrey McClendon, the U.S. oil and gas explorer secured a two-notch credit rating upgrade from Moody's. By slashing debt and simplifying Chesapeake, new boss Doug Lawler is winning over stock and bond investors alike.
McClendon left behind a company outspending cashflow from operations by about $12 billion. Labyrinthine off-balance sheet obligations also made the true scale of the company's debt burden hard to ascertain. Standard & Poor's downgraded Chesapeake's debt after it was discovered that McClendon had taken out personal loans from one of the company's business partners, the first in a series of corporate governance scandals that eventually led to his ouster.
That Chesapeake almost seems like a distant memory. For the first time in its history, according to Barclays, Chesapeake is just one notch away from a coveted investment grade rating from both top agencies. Since Lawler took over, the spread on its 2021 bonds over U.S. Treasuries has contracted by a third to about 2 percentage points. The shares, meanwhile, have surged 38 percent, outpacing those of Lawler's former employer, Anadarko Petroleum, and rival Devon Energy .
A certain amount of luck played its part. Since Lawler was picked, the price of natural gas, the mainstay of Chesapeake's output, has climbed 16 percent. That helps make its debt more sustainable.
Lawler nevertheless has pulled the right levers. He is on track to spend less than sixth of the $3.2 billion that McClendon splashed out in 2012 on land. By 2015, Chesapeake's cashflow should match its capital spending. Throw in asset sales of $4 billion this year and the company is on track to cut net debt to trailing EBITDA from around three times to below two times by 2016.
What's more, by selling off non-core businesses like oilfield services, Chesapeake is becoming easier for investors to understand. Simple solutions are often the best ones.
Source: Reuters
McClendon left behind a company outspending cashflow from operations by about $12 billion. Labyrinthine off-balance sheet obligations also made the true scale of the company's debt burden hard to ascertain. Standard & Poor's downgraded Chesapeake's debt after it was discovered that McClendon had taken out personal loans from one of the company's business partners, the first in a series of corporate governance scandals that eventually led to his ouster.
That Chesapeake almost seems like a distant memory. For the first time in its history, according to Barclays, Chesapeake is just one notch away from a coveted investment grade rating from both top agencies. Since Lawler took over, the spread on its 2021 bonds over U.S. Treasuries has contracted by a third to about 2 percentage points. The shares, meanwhile, have surged 38 percent, outpacing those of Lawler's former employer, Anadarko Petroleum
A certain amount of luck played its part. Since Lawler was picked, the price of natural gas, the mainstay of Chesapeake's output, has climbed 16 percent. That helps make its debt more sustainable.
Lawler nevertheless has pulled the right levers. He is on track to spend less than sixth of the $3.2 billion that McClendon splashed out in 2012 on land. By 2015, Chesapeake's cashflow should match its capital spending. Throw in asset sales of $4 billion this year and the company is on track to cut net debt to trailing EBITDA from around three times to below two times by 2016.
What's more, by selling off non-core businesses like oilfield services, Chesapeake is becoming easier for investors to understand. Simple solutions are often the best ones.
Source: Reuters
