Fitch Ratings has placed
The Rating Watch reflects the reasonable valuation of the all-equity transaction, the conservative proforma capital structure and the increased scale of the combined company, which will be the largest North American natural gas producer and third-largest public producer globally.
The scale and metrics of the combined entity are commensurate with an investment-grade rating. The combined company will have very strong gas positions in the Marcellus and Haynesville plays.
Chesapeake will assume Southwestern's debt after closing the transaction. Fitch expects the combined entity to maintain a sub 1.5x EBITDA leverage after closing as well as strong liquidity and a back-end maturity profile.
The Rating Watch is expected to be resolved upon the completion of the transaction under the announced terms, which may take longer than six months.
Key Rating Drivers
Significant Natural Gas Assets: The scale of the combined entity is commensurate with an investment-grade rating. Combined reserves will approach 32 trillion feet of natural gas equivalent (Tcfe) and production will approach 7.9 billion cubic feet of natural gas equivalent per day (bcfe/d), making it the third-largest public global natural gas producer. Chesapeake will have 650,000 net acres in the Haynesville and 1.2 million net acres in Appalachia. At expected production levels the company has 15 years of drilling inventory.
Conservative Financial Policy: Chesapeake's conservative financial policy is a credit strength. The company is committed to a net EBITDA leverage target of less than 1.0x at
Strategic Importance of Balance Sheet Strength: Chesapeake is highly committed to maintaining an investment-grade balance sheet following the Southwestern acquisition and Fitch expects the company to reduce total debt to approximately
Attaining and maintaining investment-grade ratings would enhance the company's ability to enter into agreements with counterparties that require investment-grade ratings. It would also enable Chesapeake to enter into the necessary long-term liquefaction contracts without having to post LCs.
Strong Forecast Metrics: Fitch forecasts sub-1.5x gross EBITDA leverage and positive FCF at its ratings case price assumptions with HH trending toward
Hedges Support Cash Flow Visibility: Chesapeake's commitment to hedging a portion of production provides downside protection to cash flows. Chesapeake maintains a policy of hedging 55%-60% of production for the next two quarters with production hedged declining 5%-10% in each subsequent quarter out to about two years.
LNG Supply Agreements: Although the LNG supply agreements that Chesapeake has entered into may allow the company to realize a price premium to
Under the contracts Chesapeake commits to supply LNG at an export facility from the
Derivation Summary
Following the close of the Southwestern transaction, Chesapeake will have production approaching 7.9 bcfe/d, which is significantly higher than peers EQT (BBB-/Stable; 5.7bcfe/d), Antero (BBB-/Stable; 3.5 bcfe/d), and Coterra (BBB/Stable; 4 bcf/d). PF netbacks as of third-quarter 2023 (3Q23) were
Key Assumptions
West Texas Intermediate of
Production flat to up low single-digits post the acquisition;
Base interest rates applicable to the company's outstanding variable-rate debt obligations reflects the Secured Overnight Financing Rate forward curve;
Annual capex between
Base dividend of
Debt maturities paid down with cash in 2025 and 2026;
No share repurchases beyond 2023.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
Fitch expects to resolve the RWP upon completion of the contemplated transaction under the proposed terms.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade independent of the transaction:
A commitment to its stated financial policy resulting in post-dividend positive FCF generation through the cycle;
Netbacks maintained above or in line with IG-rated gas peers;
Midcycle EBITDA leverage sustained at or below 1.5x.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
Failure to maintain a clear, conservative financial and operational policy;
A trend of negative FCF contributing to diminished liquidity or utilization of revolver commitment consistently above 50%;
Midcycle EBITDA leverage sustained over 2.0x;
Large creditor-unfriendly M&A;
Loss of operational momentum, with organic production trending below 3Bcfepd or materially increasing production costs.
Liquidity and Debt Structure
Strong Liquidity: PF for the acquisition, liquidity is provided by a
Back-Weighted Maturity Schedule: Chesapeake's legacy maturity schedule had maturities in 2026 and 2029. The assumption of SWN's debt enhances this back-weighted structure as
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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