Chesapeake Energy shares fall on downgrade, loan

OKLAHOMA CITY, Okla., Tue May 15, 2012 – Chesapeake Energy Corp. shares dropped as much as 6.5 percent on Tuesday following a credit rating downgrade and news that the natural gas producer will boost its borrowings to $4 billion from the planned $3 billion as it faces a liquidity crunch.

The company, facing a funding shortfall of $9 billion to $10 billion this year, said on Friday that Goldman Sachs and Jefferies Group would provide it with $3 billion.

Chesapeake’s cash flows have shrunk as natural gas prices slumped to their lowest levels in a decade, putting pressure on the second-largest U.S. producer of the fuel to raise money to fund drilling operations.

Ratings agency Standard & Poor’s said it had cut Chesapeake’s credit rating to “BB-” from “BB,” one notch lower into noninvestment, or “junk,” status. S&P cited shortcomings in the company’s corporate governance practices, concerns about loan covenants and the likelihood of a wider gap between operating cash flow and capital expenditures.

Reuters reported last month that CEO Aubrey McClendon had borrowed at least $1.1 billion against his personal stakes in the company’s wells from lenders who also had dealings with Chesapeake, a deal that analysts and academics said raises possible conflicts of interest.