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Chesapeake Energy Corp.’s 50-acre campus is located in Oklahoma City, Okla. (STEVE SISNEY/REUTERS)
Chesapeake Energy Corp.’s 50-acre campus is located in Oklahoma City, Okla. (STEVE SISNEY/REUTERS)

BREAKINGVIEWS

Reborn Chesapeake starts to hit its stride Add to ...

A reinvented Chesapeake Energy is starting to hit its stride. A year to the day after replacing profligate chief executive officer Aubrey McClendon, the U.S. oil and gas explorer secured a two-notch credit rating upgrade from Moody’s. By slashing debt and simplifying Chesapeake, new boss Doug Lawler is winning over stock and bond investors alike.

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Mr. McClendon left behind a company outspending cash flow from operations by about $12-billion (U.S.). Labyrinthine off-balance sheet obligations also made the true scale of the company’s debt burden hard to ascertain. Standard & Poor’s downgraded Chesapeake’s debt after it was discovered that Mr. McClendon had taken out personal loans from one of the company’s business partners, the first in a series of corporate governance scandals that eventually led to his ouster.

That Chesapeake almost seems like a distant memory. For the first time in its history, according to Barclays, Chesapeake is just one notch away from a coveted investment-grade rating from both top agencies. Since Mr. Lawler took over, the spread on its 2021 bonds over U.S. Treasuries has contracted by a third to about two percentage points. The shares, meanwhile, have surged 38 per cent, outpacing those of Mr. Lawler’s former employer, Anadarko Petroleum, and rival Devon Energy.

A certain amount of luck played its part. Since Mr. Lawler was picked, the price of natural gas, the mainstay of Chesapeake’s output, has climbed 16 per cent. That helps make its debt more sustainable.

Mr. Lawler nevertheless has pulled the right levers. He is on track to spend less than sixth of the $3.2-billion that Mr. McClendon splashed out in 2012 on land. By 2015, Chesapeake’s cash flow should match its capital spending. Throw in asset sales of $4-billion this year and the company is on track to cut net debt to trailing EBITDA from around three times to below two times by 2016.

What’s more, by selling off non-core businesses like oil field services, Chesapeake is becoming easier for investors to understand. Simple solutions are often the best ones.

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