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Chesapeake confident on asset sales, shares rise

05/14/2012 | 02:19pm US/Eastern

(Reuters) - Chesapeake Energy Corp sought to calm Wall Street worries about its financial position, telling investors on Monday it was confident it would complete asset sales to plug a funding gap, sending shares up as much as 11 percent.

The stock rebound came after a steep drop last week and was driven by news late Friday that the company had secured a $3 billion loan, as well as a report that activist investor Carl Icahn would take a stake in the company.

"We will get our assets sales done," Chief Executive Aubrey McClendon told analysts and investors on a conference call.

Chesapeake has been caught in a corporate governance controversy since Reuters reported last month that McClendon had mortgaged his personal stakes in the company's oil and gas wells to companies that had lent money to Chesapeake.

Chesapeake is the second-largest U.S. natural gas producer behind Exxon Mobil Corp, but its aggressive land purchases have left it short of cash.

In addition, the sharp drop in U.S. natural gas prices to their lowest level in more than a decade has left it scrambling to find cash to cover a funding shortfall estimated at about $10 billion this year.

While analysts said the new $3 billion loan may ease the pressure on Chesapeake for the short term, it comes at a high cost for the cash-strapped company.

"To me it's a really big concern because they are spending about $200 million to borrow this money," said analyst Phil Weiss at Argus Research, who noted the interest rate on the debt increases if it is not paid back this year.

On the block are the company's assets in West Texas' Permian basins, one of the most prolific oil and gas regions in the country, as well as its property in the Mississippi Lime field in northern Oklahoma and southern Kansas.

McClendon told the conference call that Chesapeake had several other assets it could put on the market, but confirmed the company would not undertake a previously planned financing deal linked to its Eagle Ford field acreage in south Texas.

The company had previously planned to sell output from that field under a "Volumetric Production Payment" or VPP, which would have brought it cash in exchange for future production.

But that deal could have crimped cash flows that are needed to back its debt, the company said, and the VPP was not expected to be part of its near-term plans to raise money.

RETURN OF ICAHN?

Disclosures of McClendon's financial dealings prompted the U.S. Securities and Exchange Commission to start an informal inquiry into the CEO's compensation program.

The company's board of directors has said it will replace McClendon as chairman in a bid to win back investors' confidence.

Still, London-based hedge fund Noster Capital sent a letter to the board on Monday urging them to terminate McClendon, the company's co-founder.

Chesapeake would not confirm that Icahn would announce he had taken a stake in the company, as reported by the Wall Street Journal.

Icahn had bought a stake in Chesapeake in late 2010, but sold it a few months later, after the company raised nearly $5 billion through an asset sale that pushed the shares sharply higher at the time.

"We have seen that (report) and wouldn't be surprised if Carl became a large shareholder," McClendon said on the Monday conference call. "He made, I think, over $500 million, and he called me to thank me" after the last year's deal.

Icahn was not immediately available to comment on the report.

Chesapeake's new $3 billion loan from Goldman Sachs Group Inc and Jefferies Group Inc will be used to pay down a $4 billion credit facility, the company said.

The company has drawn more than $3 billion of that existing loan.

The new loan is designed to give it breathing room to complete the planned asset sales, but comes with a hefty initial interest rate of 8.5 percent, and will be paid off with money from those sales.

On Friday, the cost of insuring Chesapeake's debt against potential default rose to the highest level in more than a year.

Five-year credit default swaps widened by 37 basis points to about 748 basis points. That means it costs $748,000 a year for five years to insure $10 million of debt.

CDS has widened more than 45 percent in the past 50 days, signaling sharply rising concerns about the company's ability to service its debt.

Analysts at JP Morgan cut their price target on Chesapeake shares by more than a third to $10 earlier on Monday.

Shares of Chesapeake had slumped 14 percent on Friday after the company issued its delayed quarterly regulatory filing, and said it could put off some asset sales to preserve income needed to comply with debt obligations.

On Monday afternoon, Chesapeake shares were up 5.1 percent at $15.56, off an earlier high at $16.57. As of Monday afternoon, the shares have lost 34 percent so far this year.

(Reporting By Anna Driver in Houston, Matt Daily and Melissa Mott in New York and Svea Herbst in Boston, Editing by Gerald E. McCormick, Jeffrey Benkoe and Matthew Lewis)

By Anna Driver and Matt Daily

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