Standard & Poor's Ratings Services reports its ratings, including a “BB” corporate credit rating, on Chesapeake Energy Corp., Oklahoma City, (NYSE: CHK) remain on CreditWatch with positive implications.

            S&P credit analyst David Lundberg says, “Despite the recent negative market sentiment, we still expect the company to maintain sufficient liquidity. Proceeds from expected near-term asset monetizations and operating cash flow should exceed cash outflows, allowing the company to increase its cash balance in the fourth quarter.”

            S&P reports it would raise the ratings if Chesapeake executes its planned asset monetizations and expands its cash balance in the fourth quarter and the company is committed to maintaining adequate liquidity in 2009.

            Chesapeake's business-risk profile is of investment-grade caliber and its financial leverage would not necessarily preclude a one-notch upgrade, S&P reports.

            If asset monetizations appear stalled, ratings will largely depend on management’s subsequent actions. Chesapeake's capital budget is mostly discretionary and the company can pare spending sharply, but that would likely decrease expected production growth, which has been a key focus for management. In this scenario, S&P still could consider an upgrade if the company scales back capex to such an extent that it remains at least cash-flow-breakeven for the quarter. S&P conversely could revise the outlook to developing or negative if liquidity worsens from recent levels.

            Chesapeake's credit default swap spreads widened last week to roughly 800 basis points. Even compared with the rest of the industry, investors seemingly were more concerned about Chesapeake’s liquidity, S&P reports.

Chesapeake has announced that it still anticipates $2.5- to $3 illion in cash proceeds in the fourth quarter from asset sales and a fourth volumetric-production-payment deal. It reduced 2009 and 2010 capex by $1.5 billion and has made further cuts in this quarter. It has $1.5 billion in cash on hand, and was expected to be in full compliance with its financial covenants at third-quarter-end with significant cushion.

            The company remains highly hedged with 81%, 72% and 46% of expected fourth-quarter 2008, 2009 and 2010 production hedged at relatively attractive prices, although certain swaps are subject to “knock-out” provisions.

            S&P had placed Chesapeake’s ratings on CreditWatch with positive implications following a stock offering and its announced joint venture with Plains Exploration & Production Co. in the Haynesville shale. These plus management’s statements that it would enter more joint ventures, gave S&P confidence that the company would better manage the cash requirements of its capital program. SJP