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Chesapeake Energy Corporation (CHK - Analyst Report) continues with its divestiture program as it plans to sell off half a million acres of its holdings in the Rocky Mountains. This move once more highlights Chesapeake’s endeavor to close a funding gap of $9 billion to $10 billion.
Chesapeake − the second largest U.S. gas producer after ExxonMobil Corporation (XOM - Analyst Report) − intends to divest approximately 504,000 net acres of land that includes leases for oil and gas production in the Denver-Julesberg (DJ) Basin of northern Colorado and southern Wyoming. The properties set for sale also comprise 29 operated and producing wells in the southern portion of the DJ Basin as well as Chesapeake's share in 24 non-operated wells. Some of the properties are also situated in the Niobrara shale, where the company registered disappointing results in February.
This sale covers Chesapeake's entire holdings in northeastern Colorado, enabling it to focus more on the development of its 500,000 net acres of Niobrara leasehold in the Powder River Basin located in east central Wyoming. Chesapeake now focuses on ten areas it considers as core to the company.
In February last year, Chesapeake sold a 33% stake in 800,000 acres as well as some of its properties in the DJ Basin for $570 million in cash to CNOOC Ltd. (CEO - Analyst Report). The latest deal will not affect the joint venture as the company has shifted its drilling plans.
The company has been in the news in recent times as it is struggling to fund its capital budget amid diminishing cash flows. Chesapeake increased the size of its unsecured term loan to $4 billion from $3 billion, for paying down its revolving credit line. The new loan comes at an initial interest rate of 8.5%, which could eventually exceed 11.5% if the company fails to pay it off by the end of the year.
Additionally, ratings agency Standard & Poor's also slashed Chesapeake's credit rating to "BB-" from "BB”. This is the second time that the agency downgraded its rating on Chesapeake in recent months highlighting concerns over the company's ability to finance its operations due to a wider gap between operating cash flow and capital expenditures. The rating downgrade took a toll on the Chesapeake stock, with shares falling 5.6% to $14.65 on May 15. This is the worst fall for the Chesapeake stock in more than three years.
Chesapeake is in the midst of a restructuring plan that intends to reduce its long-term debt to $9.5 billion by the end of the year through monetizing its assets and reducing lease-hold spending. The transformation also aims at a change in Chesapeake’s company profile from a natural gas-focused producer to a more balanced liquids-focused producer.
Chesapeake holds a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months.