Chesapeake is a producer of oil and natural gas based in Oklahoma City. With $1.95 billion in bonds outstanding spread out over seven issues, Chesapeake is considered by many investors to be the largest high-yield energy issuer, though opinions vary on how the sector should be defined.
Rowland, 51, joined Chesapeake as a consultant in 1992 and became cfo after helping the company go public the following year.
Have you noticed any changes in the high-yield market last 10 years?
There have been substantial changes for us and I think in the market as well. We went from a very small company where $47.5 million was a critical issue for us and now we've had issues as large as $800 million. So, with nearly $2 billion in debt outstanding in the high-yield market, we're probably the largest issuer in the sector. We're now widely followed, widely held and our bonds trade at a premium to par. The issuance can be done if we choose to in a briefly marketed or bought deal even. That is a dramatic change from when we brought our small issue in 1994.
Have you generally been satisfied with the way your bonds trade? Have you noticed any differences between the way they trade versus equity or loans?
The equity I think trades in line with our peer group, but I would suspect we're more widely appreciated in the high-yield market. We've had a great relationship with bond owners and we've made most people a lot of money over time. People appreciate our risk management strategies regarding hedging and those things are quickly reflected in how the bonds have traded. Of course we have very large liquid issues and I'd say most investors regard them as sort of a bellwether as to how the sector goes.
Are you satisfied with the company's issuer rating?
We have just received an upgrade from Standard & Poor's within the last couple of months as a result of our bank credit amendment. They bumped up our unsecured credit, so we're now Ba3/BB-.
Are we satisfied? No. We believe we should be rated higher than we are. We've felt that for some time. If you look at our bond trading levels, most would agree we trade at a significantly higher level than what our rating would suggest. [Chesapeake's issues traded at an average spread of 306 basis points over the Treasury curve through last Wednesday, compared to an average of 400 basis points over the curve for identically-rated issues, according to Merrill Lynch data.]
Are there any high-yield analysts or investors who you think have a particularly good understanding of the company, or any you've had disagreements with?
On the analyst side we have had great support and we consider the high-yield analysts very astute evaluators. Some people that come to mind are Eric Dybesland at Lehman Brothers, Dirk van Doren at Goldman Sachs, Kelly Krenger at[Banc of America Securities] and Keith Petersen at Citigroup. We're widely followed and typically they're spot on and they make relative hold or buy recommendations based on how fully valued we are relative to others in our peer group. Regarding their assessment of the company we've had no disagreements with them.
With respect to the individual investors we're widely held across many of the big names. Franklin [Templeton Investments] would be a large holder; we've had a great relationship with them--PIMCO, Fidelity Investments: at any one time Fidelity may own as much as 7-8% of our issuance and I think we have a great relationship with them.
Some fixed-income dealers appear to have concerns about potential conflicts regarding analyst communications. Bear Stearns and UBS Warburg have been most visible in addressing these. Do you see any potential problems on the fixed-income side?
No I don't. I was not aware that Bear and UBS Warburg had taken any such steps. I'd say on the fixed-income side that's definitely a minority reaction. Generally, the conflict of interest question has in my opinion not been raised with respect to fixed-income. Of course there are several obvious reasons for that: largely, fixed-income is sold on either a private placement or institutional basis and you don't have the IPO issues and the retail investor lack-of-sophistication issues.
I don't generally see a lot of fixed-income analysts in conjunction with investment bankers, but at the same time I have seen no restrictions on the analysts talking with investment companies or being involved in answering investment banking questions about how a deal might be perceived or how the investors might react to Chesapeake or any other company doing something.
You recently sold close to half of your equity shares in Chesapeake. Why?
I've been on a program personally to sell a portion of my shares. I think I've done so every year since 1994 with the exception of 1998 and 1999. I presently own either in direct ownership, retirement plans or through option programs over half a million shares, so it is not unusual--in fact it a very usual thing for an investor to see me sell 10-15% of that on an annual basis.
I would point out that net management purchases have been the highest in the sector. Our two co-founders, Aubrey McClendon and Tom Ward, bought over $2.7 million shares of common stock in the open market this year.
What attributes do you look for when choosing an investment bank to represent you on a high-yield bond sale?
Distribution capability is probably number one, two and three: the ability to either place an issue through an institutional sales force or arrange the meetings with investors to create successful execution and strong after-market support so that the buyer of our bonds is pleased. That paves the way for successful additional offerings as in the future as warranted.
I don't think with a company our size that the analyst has all that much persuasive ability relative to the larger funds that we would be selling to: a PIMCO or a Franklin or a Fidelity. Having been an issuer for 10 years now with multiple issues, we're widely represented by myself or Aubrey McClendon (Chesapeake's president) at every conference. We do a fair amount of non-deal roadshow education. We are well known at those firms not only by the portfolio managers, but the internal analysts as well. Frequently I will be called by those folks offering to do a one-off deal, or, for example, just checking the pulse of the company. With the open communication style that we have, with our disclosure on our website--which has been up for three years--of our own projections, as nice as the [sell-side] analysts are and as smart as they are, they're less relevant for a Chesapeake in this market than maybe other newer smaller issuers.
What are you seeing in terms of acquisition opportunities? Any interest in expanding assets beyond mid-continent, whether in other parts of the U.S. or internationally?
We ourselves have done $1.3 billion of acquisitions this year. We do not have any material acquisitions pending at this point, though we consider acquisitions every day: it's part of our core business. We have no interest other than onshore U.S. properties.