Chesapeake Faces Moody’s Rating Action on Low Crude Price

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Chesapeake Energy Corporation’s CHK outlook was downgraded to stable from positive by Moody's Investors Service. The revision reflects the rating agency’s apprehensions pertaining to low natural gas and oil prices. However, Moody’s has maintained Chesapeake's Ba1 Corporate Family Rating (CFR) and Ba1 senior unsecured notes ratings.

Credit rating downgrade from a reputed agency like Moody’s has its implications as it limits borrowing capacity. The rating agency is apprehensive that the fall in oil, natural gas and natural gas liquids (NGL) prices will substantially reduce Chesapeake's cash flow over the remainder of 2015 and throughout 2016 as its commodity price hedges roll off.

While the company entered 2015 with over $4 billion of cash owing to the successful completion of a major asset sale late last year, it will have to utilize a large portion its cash balance to fund negative free cash flow as it ratchets down its capital spending over the course of the year. The company is reducing capital spending to keep it within cash flow by the end of this year and plans to appropriately maintain a sizable cash balance for liquidity needs.

Chesapeake Energy is an independent oil and gas company engaged in the development, exploration, acquisition and production of onshore natural gas and oil reserves. The company owns interests in producing oil and gas wells concentrated in three primary operating areas: the Mid-Continent region of Oklahoma, western Arkansas, southwestern Kansas and the Texas Panhandle; the Gulf Coast region; and the Helmet area of northeastern British Columbia. Chesapeake is the second largest U.S. natural gas producer after ExxonMobil Corporation XOM.

The company currently carries a Zacks Rank #3 (Hold), implying that to the stock will perform in line with the broader U.S. equity market over the next 1 to 3 months. However, there are other stocks in the oil and gas sector – LRR Energy LP LRE and WPX Energy Inc. WPX – which hold a Zacks Rank #1 (Strong Buy) and are expected to outperform the equity market.

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