?Chesapeake Energy Corp.’s mea culpa by cancelling its announced distribution-agency agreements and cutting a planned shelf registration by half in a week’s time is a fast act of strategic response in a fluid environment. The retrench is a minor adjustment for a company caught in a cash pinch and ferociously fighting its way out of a predicament against significant odds.


Chief executive Aubrey McClendon concedes that the market response to the filings was “obviously very negative” and underestimated by management. “Our intent was to create broad financial flexibility for an uncertain economic environment and commodity-market environment over the next few quarters. In retrospect, we made a mistake.”


It just didn’t work. The strategy to raise $1.8 billion in equity was actually quite shrewd as a way to keep the cash flowing for a company addicted to running and gunning, and facing a $2.3-billion budget shortfall at $6 natural gas.


So, short of that source of capital, liquidity remains an issue at Chesapeake. Analysts at Tudor, Pickering, Holt & Co. suggest the pre-Thanksgiving shelf offering on the heels of a $1.25-billion Marcellus joint-venture sale to StatoilHydro illustrates the company may need even more cash now.


It also illustrates that the debt markets are still closed to Chesapeake, bought deals are still unavailable—i.e. investment banks have no money—and the asset-sales market is very weak. “Liquidity could be worse than expected.”


But Calyon Securities (USA) Inc. analyst Jeb Armstrong analyzes the specter of Chesapeake facing bankruptcy as remote. The current snapshot: Chesapeake is sitting on $1.5 billion of cash and was to end 2008 with $2- to $2.5 billion when VPP (volumetric production payment) No. 4 in the Anadarko Basin closes.


Switching gears and transforming the South Texas asset divestiture to a VPP could raise an additional $450 million. Armstrong says more VPP sales during the next two years, along with the sale of an interest in its midstream assets, could double its cash balance.


If the credit markets begin to thaw, he says, Chesapeake would likely use the cash to begin paying down the $3.5-billion balance on its credit revolver. Now, he chides, “management must show that it can maintain financial discipline and wean itself from capital markets.”


In lieu of not having the cash potential from an equity issuance, Chesapeake has followed the hard march of its peers—painfully cutting 2009 capex 31% to match cash flow for a total capex of $3.8 billion, reducing growth forecasts between 5% and 10% for 2009, and 10% and 15% for 2010. Significantly, it also whacked its budget for leasehold and producing-property acquisitions by 78%, or $2.2 billion for the next couple of years.

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