CHESAPEAKE ENERGY CORP CHK
February 08, 2011 - 6:16pm EST by
sparky371
2011 2012
Price: 31.50 EPS $1.50 $2.85
Shares Out. (in M): 650 P/E 21.0x 11.0x
Market Cap (in $M): 21 P/FCF 0.0x 0.0x
Net Debt (in $M): 13 EBIT 0 0
TEV ($): 33 TEV/EBIT 0.0x 0.0x

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Description

What can you say about a stock that is universally loathed. That doesn't have a single "buy" rating from any major Wall Street house that I'm aware of.  That is run by a guy  many believe is a gambler and a leverage junkie; who ran the stock up to $72 (I still have 100 shares in a tiny IRA that I purchased there.) before personal and firm leverage, financial and operating, caused a spectacular crash to $15, whereabouts the CEO himself got puked out of his personal position of millions of shares.

The stock is Chesapeake Energy (CHK). And, say what you will about Aubrey McClendon, but one thing I've learned about him is that he's at his worst, and gets into trouble, when things are good (and he can borrow money). He's at his best when things look bleak and he has to scramble to save the firm (again). 

A little background for newcomers. CHK was one of the first to recognize the potential of  the original shale gas plays. Aubrey moved aggressively acquiring leaseholds at ever increasing prices under the assumption that the recent sky-high NG prices would persist, at least to some degree. He borrowed to finance these acquisitions.

Then, NG crashed as shale gas plays became plentiful and as good old American ingenuity drove costs down and production up.

The stock tanked, Aubrey had his personal holdings sold out on a margin call, near the lows, and CHK was written off in revulsion by investors.

So, what does CHK then do? They see the huge valuation gap between oil (and also Natural Gas Liquids) and dry NG; and they also see how the same horizontal drilling that opened up shale gas was now going to open up shale oil plays, and Aubrey moved aggressively to acquire land positions in the nascent shale oil plays. Fairly quickly, the oil shale plays started to gain credibility as a highly profitable unconventional source of oil.

Now, CHK is saddled with a lot of debt and the need for capex in order to perform HBP (Held By Production) drilling on the original NG leases. But, it also has some of the best land positions in many of the new NG and oil plays; and a mid-teens stock price that few have any enthusiasm for. In fact, very few people are even aware of CHK's moves and still consider it a NG stock in a lousy NG tape. It won't be for long. (CHK expects that drilling capital for liquids will have gone from 10% of budget in 2009 to 70% in 2012.)

The solution?  Joint Ventures and the 25/25 Plan. The latter is a goal of reducing debt by 25% by year-end 2011 and reducing production growth, via JV's, to 25% from the anticipated 30-40%.  JV partners have been top-shelf firms, including  PXP, BP (OK, no BP jokes), STO, TOT and CNOOC.

A great deal of the information I have is from CHK's  February2011 Investor Presentation, which is a must-read for investors. (http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDExNTQzfENoaWxkSUQ9NDIzODgxfFR5cGU9MQ==&t=1)

This was an ingenious solution in several ways. By monetizing these assets for both cash and future drilling carries, CHK was able to simultaneously take in cash, lower future cash needs and dramatically revalue upwards their remaining holdings (Slide 20 of Inv Pres.). An excerpt from a Scotia report on the latest JV follows, and is illustrative:

Transaction details.

* Chesapeake sold 33.3% of its 800,000 net acres in the Denver-Julesburg (DJ) and Powder River Basins (see Exhibit 1) to CNOOC for a total of $1.267B ($570M in cash and $697M in drilling carries). Applying a present value factor to the drilling carries, which are expected to be incurred by year-end 2014, implies a total value of $1.159B.

* Assuming $70,000/boe/d for production implies ~$4,600/acre (undiscounted) or ~$4,200/acre (discounted).

* CNOOC will have the option to acquire a 33.3% share of any additional

acreage acquired by Chesapeake in the area and the option to participate in midstream infrastructure.

* The transaction more than recovered Chesapeake's total (100%) DJ and Powder River land cost of ~$800M and implies a value of ~$2.45B for its retained acreage (~533,280 net acres).

* Over the past five years, the company has invested ~$14.8B on land in the Barnett, Fayetteville, Haynesville/Bossier, Marcellus, Eagle Ford, and DJ/Powder River. Through its six JV transactions announced to date, the company has recovered ~$14.1B in cash and drilling carries.

 

So, where does this leave us with CHK? Referring again to the Feb2011 Investor Presentation:  CHK has only onshore US energy plays. Expects 100K bpd of liquids by yr-end 2011 (up to #13 in ranking in the US), 150K bpd by yr-end 2012 (up to #8), and 250K bpd by 2015...all the while expecting to be the #2 US NG producer. CHK believes it has a potential net unrisked resource of 142tcf of NG and 11B bbls of oil. The firm models (using $6NG and $90 oil, which is arguably optimistic.) combined 2011-2012 EBITDA of $10.8B, $10.2B of cash flow, and net income of $3.8B and projects for 2015 EBITDA of $10.2B, CF of $10B, and net income of $4.4B, while growing production, growing reserves and reducing debt.

On the negative side, there is some Aubrey Magic in the 2011 NG hedges. Buried in the footnote on hedging is a reference to "swap positions include the benefit of premiums received in connection with sold calls for a portion of future NG and oil production". It's unclear exactly what they did, but they apparently juiced near-term hedging prices by selling some portion of future production at some unknown price.

On the rather bizarre side is a reference to them being "#1 in an unnamed big liquids play" of greater than 1MM acres. Details to come in 1H11.

The latest JV has started to get the Street looking at CHK again. The sharp guys at Pickering were the first blue chip firm to recognize the transformation and recently upped their rating on the stock to a "buy". "Accelerated activity, plus further asset monetizations...set CHK up to be the most improved E&P story in 2012".  And then there's Carl Icahn, who has taken a large (and thus far very profitable) stake in CHK.  I believe he will keep Aubrey from doing anything rash and will ultimately catalyze the most possible value from CHK. With so many moving parts, it's impossible to come up with a definitive value for CHK. But, a sharp friend suggested one back of the envelope comparison: APC has liquids production of just under 200K bpd and a market cap of $40B, twice that of CHK; or an EV of $49B vs $33B for CHK.  And CHK is the #2 NG US NG producer. Bit of  an apples to oranges comparison, recognizing that both companies have very different assets, but a useful point nonetheless. I think that Pickering is just ahead of the pack in recognizing the transformation and value here. I believe that other firms will follow along as it becomes "safe" to do so, and the price is higher. In fact, I have been meaning to write this up for VIC for 6 weeks, but was waiting for the clarity that the membership often demands. The stock is now higher and I have very mixed feelings on my delaying posting it because I did not (and still do not, realistically) have the kind of hard numbers that many members need to be comfortable with an idea. I do think the stock has room to run in the interim as Wall Street discovers it; and will be a great long term value investment as long as energy does not sell off.

My personal speculation on how this plays out is that NG recovers a bit to the $6 level, making the NG side of the business active and attractive. I suspect that Aubrey will be chafing under the constraints of Icahn and will ultimately split the company into a NG-oriented firm and an oil-related firm. This will simultaneously unlock a lot of value, give Icahn his exit, and allow Aubrey to take the helm of one of the firms, most likely the NG firm.

 

Catalyst

Continued monetization of assets to crystallize value and deleverage, particularly possible asset drop downs to CHKM.
 
Icahn pushing for value creation and discipline.
 
Street recognition of value creation, shift to oil assets, shift to fiscal discipline via 25/25 program.
 
Possible split, ultimately, of NG and oil assets into two separate firms to unlock value of both, a la Encana.
    sort by    

    Description

    What can you say about a stock that is universally loathed. That doesn't have a single "buy" rating from any major Wall Street house that I'm aware of.  That is run by a guy  many believe is a gambler and a leverage junkie; who ran the stock up to $72 (I still have 100 shares in a tiny IRA that I purchased there.) before personal and firm leverage, financial and operating, caused a spectacular crash to $15, whereabouts the CEO himself got puked out of his personal position of millions of shares.

    The stock is Chesapeake Energy (CHK). And, say what you will about Aubrey McClendon, but one thing I've learned about him is that he's at his worst, and gets into trouble, when things are good (and he can borrow money). He's at his best when things look bleak and he has to scramble to save the firm (again). 

    A little background for newcomers. CHK was one of the first to recognize the potential of  the original shale gas plays. Aubrey moved aggressively acquiring leaseholds at ever increasing prices under the assumption that the recent sky-high NG prices would persist, at least to some degree. He borrowed to finance these acquisitions.

    Then, NG crashed as shale gas plays became plentiful and as good old American ingenuity drove costs down and production up.

    The stock tanked, Aubrey had his personal holdings sold out on a margin call, near the lows, and CHK was written off in revulsion by investors.

    So, what does CHK then do? They see the huge valuation gap between oil (and also Natural Gas Liquids) and dry NG; and they also see how the same horizontal drilling that opened up shale gas was now going to open up shale oil plays, and Aubrey moved aggressively to acquire land positions in the nascent shale oil plays. Fairly quickly, the oil shale plays started to gain credibility as a highly profitable unconventional source of oil.

    Now, CHK is saddled with a lot of debt and the need for capex in order to perform HBP (Held By Production) drilling on the original NG leases. But, it also has some of the best land positions in many of the new NG and oil plays; and a mid-teens stock price that few have any enthusiasm for. In fact, very few people are even aware of CHK's moves and still consider it a NG stock in a lousy NG tape. It won't be for long. (CHK expects that drilling capital for liquids will have gone from 10% of budget in 2009 to 70% in 2012.)

    The solution?  Joint Ventures and the 25/25 Plan. The latter is a goal of reducing debt by 25% by year-end 2011 and reducing production growth, via JV's, to 25% from the anticipated 30-40%.  JV partners have been top-shelf firms, including  PXP, BP (OK, no BP jokes), STO, TOT and CNOOC.

    A great deal of the information I have is from CHK's  February2011 Investor Presentation, which is a must-read for investors. (http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDExNTQzfENoaWxkSUQ9NDIzODgxfFR5cGU9MQ==&t=1)

    This was an ingenious solution in several ways. By monetizing these assets for both cash and future drilling carries, CHK was able to simultaneously take in cash, lower future cash needs and dramatically revalue upwards their remaining holdings (Slide 20 of Inv Pres.). An excerpt from a Scotia report on the latest JV follows, and is illustrative:

    Transaction details.

    * Chesapeake sold 33.3% of its 800,000 net acres in the Denver-Julesburg (DJ) and Powder River Basins (see Exhibit 1) to CNOOC for a total of $1.267B ($570M in cash and $697M in drilling carries). Applying a present value factor to the drilling carries, which are expected to be incurred by year-end 2014, implies a total value of $1.159B.

    * Assuming $70,000/boe/d for production implies ~$4,600/acre (undiscounted) or ~$4,200/acre (discounted).

    * CNOOC will have the option to acquire a 33.3% share of any additional

    acreage acquired by Chesapeake in the area and the option to participate in midstream infrastructure.

    * The transaction more than recovered Chesapeake's total (100%) DJ and Powder River land cost of ~$800M and implies a value of ~$2.45B for its retained acreage (~533,280 net acres).

    * Over the past five years, the company has invested ~$14.8B on land in the Barnett, Fayetteville, Haynesville/Bossier, Marcellus, Eagle Ford, and DJ/Powder River. Through its six JV transactions announced to date, the company has recovered ~$14.1B in cash and drilling carries.

     

    So, where does this leave us with CHK? Referring again to the Feb2011 Investor Presentation:  CHK has only onshore US energy plays. Expects 100K bpd of liquids by yr-end 2011 (up to #13 in ranking in the US), 150K bpd by yr-end 2012 (up to #8), and 250K bpd by 2015...all the while expecting to be the #2 US NG producer. CHK believes it has a potential net unrisked resource of 142tcf of NG and 11B bbls of oil. The firm models (using $6NG and $90 oil, which is arguably optimistic.) combined 2011-2012 EBITDA of $10.8B, $10.2B of cash flow, and net income of $3.8B and projects for 2015 EBITDA of $10.2B, CF of $10B, and net income of $4.4B, while growing production, growing reserves and reducing debt.

    On the negative side, there is some Aubrey Magic in the 2011 NG hedges. Buried in the footnote on hedging is a reference to "swap positions include the benefit of premiums received in connection with sold calls for a portion of future NG and oil production". It's unclear exactly what they did, but they apparently juiced near-term hedging prices by selling some portion of future production at some unknown price.

    On the rather bizarre side is a reference to them being "#1 in an unnamed big liquids play" of greater than 1MM acres. Details to come in 1H11.

    The latest JV has started to get the Street looking at CHK again. The sharp guys at Pickering were the first blue chip firm to recognize the transformation and recently upped their rating on the stock to a "buy". "Accelerated activity, plus further asset monetizations...set CHK up to be the most improved E&P story in 2012".  And then there's Carl Icahn, who has taken a large (and thus far very profitable) stake in CHK.  I believe he will keep Aubrey from doing anything rash and will ultimately catalyze the most possible value from CHK. With so many moving parts, it's impossible to come up with a definitive value for CHK. But, a sharp friend suggested one back of the envelope comparison: APC has liquids production of just under 200K bpd and a market cap of $40B, twice that of CHK; or an EV of $49B vs $33B for CHK.  And CHK is the #2 NG US NG producer. Bit of  an apples to oranges comparison, recognizing that both companies have very different assets, but a useful point nonetheless. I think that Pickering is just ahead of the pack in recognizing the transformation and value here. I believe that other firms will follow along as it becomes "safe" to do so, and the price is higher. In fact, I have been meaning to write this up for VIC for 6 weeks, but was waiting for the clarity that the membership often demands. The stock is now higher and I have very mixed feelings on my delaying posting it because I did not (and still do not, realistically) have the kind of hard numbers that many members need to be comfortable with an idea. I do think the stock has room to run in the interim as Wall Street discovers it; and will be a great long term value investment as long as energy does not sell off.

    My personal speculation on how this plays out is that NG recovers a bit to the $6 level, making the NG side of the business active and attractive. I suspect that Aubrey will be chafing under the constraints of Icahn and will ultimately split the company into a NG-oriented firm and an oil-related firm. This will simultaneously unlock a lot of value, give Icahn his exit, and allow Aubrey to take the helm of one of the firms, most likely the NG firm.

     

    Catalyst

    Continued monetization of assets to crystallize value and deleverage, particularly possible asset drop downs to CHKM.
     
    Icahn pushing for value creation and discipline.
     
    Street recognition of value creation, shift to oil assets, shift to fiscal discipline via 25/25 program.
     
    Possible split, ultimately, of NG and oil assets into two separate firms to unlock value of both, a la Encana.

    Messages


    SubjectMwatch: CHK’s Fayetteville fields ripe for deal
    Entry02/11/2011 09:19 AM
    Membersparky371
    Chesapeake's Fayetteville fields ripe for deal
    Energy lawyer expects interest after Petrohawk sold acreage

    By Steve Gelsi, MarketWatch

    NEW YORK (MarketWatch) -- Chesapeake Energy Corp. will have little trouble drawing a buyer for its vast acreage in the Fayetteville shale of northern Arkansas, judging by the success of a smaller deal in the same area, a corporate lawyer active in energy transactions said.

    Meanwhile, one analyst has estimated that Chesapeake (NYSE:CHK) could fetch a price of $3.5 billion for its Fayetteville property.

    Bob Thomas, a partner at Houston-based Porter Hedges LLP, said interest remains high in U.S. acreage from larger companies as a way to gain access to energy supplies. Foreign-based suitors also hope to learn how to apply U.S. shale-extraction methods elsewhere around the globe.


    Mubarak clings to powerHosni Mubarak surprised many when he announced he would not step down as Egypt's president. Tamer El-Ghobashy has reaction from Cairo's Tahrir Square. John Bussey and Jerry Seib have analysis of the situation.
    "You'll see some of the larger players consolidating their positions, offering to buy out some of the smaller players," Thomas said in a telephone interview this week. "These are expensive wells that can cost $7 million or $8 million each. When you have national oil companies or bigger companies coming in, they have the [needed] capital. There's a a ton of smaller companies that may be willing at some price to sell out."

    Since natural-gas prices remain low compared with rising oil prices, fields containing crude in small pockets now accessible from newer horizontal drilling techniques now draw stronger interest from buyers.

    In the particularly hot Eagle Ford shale area of south Texas, lease prices have shot up to several thousand dollars an acre, from about $500 an acre just two or three years ago, according to Thomas.

    In one such deal last year, private-equity giant KKR bought a 40% stake in the Eagle Ford shale for $400 million from Hilcorp Energy Co., the Houston firm headed by billionaire Jeff Hildebrand.

    Energy companies are ramping up efforts in the oil-rich areas like Eagle Ford and placing other properties on the block to raise cash. "Obviously somebody is going to pay a lot of money for Chesapeake's Fayetteville property," Thomas said. "You'll find companies very much interested in taking that position off [their] hands."

    Chesapeake announced plans on Feb. 7 to sell its 440,000 acres of leasehold in the Fayetteville shale to raise money to pay down debt and focus on other areas in its vast domestic base. See recent Energy Stocks column on Chesapeake deal.

    This deal and others will keep the pipeline healthy in 2011 after a strong 2010, Thomas added.

    In an encouraging sign for Chesapeake's deal, Thomas pointed out that Petrohawk Energy Corp. (NYSE:HK) had little trouble finding a buyer for its Fayetteville shale acreage last year, striking a deal with a subsidiary of Exxon Mobil Corp. (NYSE:XOM) The transaction closed on Dec. 23 for a price of $575 million.

    Analyst Biju Perincheril of Jefferies wrote in a note that Chesapeake's Fayetteville properties could sell for about $3.5 billion, based on the price paid for the Petrohawk acreage.

    Besides Chesapeake, other companies that have had a presence in the Fayetteville shale include Devon Energy Corp. (NYSE:DVN) , Southwestern Energy Co. (NYSE:SWN) , Plains Exploration and Production Co. (NYSE:PXP) , Penn Virginia Corp. (NYSE:PVA) , Noble Energy Inc. (NYSE:NBL) , Marathon Oil Corp. (NYSE:MRO) , Anadarko Petroleum Corp. (NYSE:APC) and Carrizo Oil & Gas Inc. (NASDAQ:CRZO)

    China remains high on the list as a possible Fayetteville suitor after a string of high-profile deals, including Wednesday's agreement for PetroChina Co. Ltd. (NYSE:PTR) to pay $5.5 billion for a chunk of EnCana Corp.'s (NYSE:ECA) fields in Canada.

    On Jan. 30, China's CNOOC Ltd. (NYSE:CEO) pledged to pay Chesapeake up to $1.3 billion for access to its Niobrara fields in northeast Colorado and southeast Wyoming

    SubjectCHK sells Fayetteville assets for $4.75B
    Entry02/21/2011 06:05 PM
    Membersparky371
    On Monday February 21, 2011, 6:00 pm

    BANGALORE (Reuters) - Chesapeake Energy Corp (NYSE:CHK - News) said it is selling its holdings in Arkansas' Fayetteville shale natural gas field to a unit of BHP Billiton (ASX:BHP.AX - News; LSE:BLT.L - News) for $4.75 billion in cash.

    Chesapeake said the deal with BHP Billiton Petroleum includes existing net production of about 415 million cubic feet of natural gas equivalent per day and midstream assets with about 420 miles of pipeline.

    Chesapeake has agreed to provide essential services for up to one year for BHP Billiton's Fayetteville properties.

    The deal is expected to close in the first half of 2011.

    (Reporting by Saqib Iqbal Ahmed in Bangalore; Editing by Maju

    SubjectAnother Buy reco, with $49 PT
    Entry02/24/2011 09:49 AM
    Membersparky371
    Chesapeake Energy (CHK_) upgraded at Canaccord from Hold to Buy, Canaccord Genuity said. $49 price target. Company is improving capital productivity and realizing higher gas prices.

    SubjectRE: RE: CHK sells Fayetteville assets for $4.75B
    Entry01/19/2012 09:54 PM
    Membersugar
    I've always wondered about that. Here's one theory - their early multi-national JV participants did extremely well. Statoil got an amazing deal in the Marcellus. Total (I think) did alright in the Barnett. So I think they take that early performance (and probably don't mention the disasterous Plains deal) and shop it to the big national and multi-national oil companies.
     
    But there may be some compromising pictures to seal the deal. Crazier things have happened.

    SubjectRE: CHK sells Fayetteville assets for $4.75B
    Entry01/19/2012 10:10 PM
    Membersugar
    Oh, and everyone claims there is "technology transfer" but I can think of way way cheaper ways to transfer technology than to overpay for mediocre natural gas assets by 3x in multi-billion dollar deals or overpay for "oil shale" assets by even more than that. Like hiring 200 of the top geologists, land men, engineers, etc from across the US E&P industry and paying them half a million dollars a year each.
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