Chesapeake cash crunch to widen without oilfield sales

Aug. 6 (Bloomberg) -- Slumping oil and natural-gas prices threaten to exacerbate a cash crunch at Chesapeake Energy Corp., adding to pressure on Chief Executive Officer Aubrey McClendon to sell oilfields from Texas to Ohio.

Chesapeake relies on gas and its byproducts such as ethane for 90 percent of its production, and gas prices in the second quarter were down 46 percent from a year ago. That will probably force the company to lower its 2012 operating cash flow forecast, said Mark Hanson, an analyst at Morningstar Investment Services in Chicago.

McClendon has pledged to raise as much as $20.5 billion by the end of next year to fund drilling and maintain debt covenants. Without the sales, the cash-flow gap will widen to $18.6 billion by the end of 2013 and force Chesapeake to cancel drilling projects and reduce production targets, said James Sullivan, an analyst at Alembic Global Advisors in New York.

“They will get the asset sales done this year that they’ve promised to, but the question is 2013 -- where do they go from there after they’ve sold all the best stuff they had to offer?” Hanson said. “The leash will be much shorter and McClendon’s options much more limited.”

The Oklahoma City-based company is scheduled to announce second-quarter results after U.S. stock markets close today. Net income excluding one-time gains and losses is estimated by analysts to fall more than 80 percent to $99.6 million from $571 million a year earlier, based on data compiled by Bloomberg.

Leadership Shakeup

Chesapeake’s market value plunged to a three-year low in May as a glut-driven slump in gas prices squeezed the company’s cash flow and forced McClendon to accelerate the pace of asset sales. Gas prices have recovered from a 10-year intraday low of $1.902 in April, closing Aug. 3 at $2.877 per million British thermal units in New York. That’s still well below highs of more than $13 in 2008.

Investors have battered Chesapeake stock amid two federal probes of potential conflicts between the CEO’s personal financial transactions and corporate duties. McClendon, 53, was forced out as chairman in June and more than half the board was replaced as Chesapeake’s largest shareholders, Southeastern Asset Management Inc. and Carl Icahn, agitated for governance reforms.

McClendon also is losing access to a corporate perk that allowed him to buy personal stakes in almost every well the company drilled. The U.S. Internal Revenue Service and Securities and Exchange Commission are conducting inquiries.

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