CHK - Chesapeake Energy

[wachtwoord]

This seems to trade way too cheap. I initiated a position.

[bigbluffzinc]

Bloodbath today.. 

 

 

[Jurgis]

I have a tiny position and I might buy more, but...

 

I don't particularly like that their drilling expenditures are much higher than OCF and have not dropped from last year: http://finance.yahoo.com/news/chesapeake-energy-corporation-reports-2015-110100482.html

 

Sure, they have a bunch of cash (unlike some other E&Ps), but shouldn't they cut the drilling more?

[Wilson-TPC]

I have a tiny position and I might buy more, but...

 

I don't particularly like that their drilling expenditures are much higher than OCF and have not dropped from last year: http://finance.yahoo.com/news/chesapeake-energy-corporation-reports-2015-110100482.html

 

Sure, they have a bunch of cash (unlike some other E&Ps), but shouldn't they cut the drilling more?

 

In order to keep productions flat, CHK needs to spend roughly 2 billion. Productions flat = revenue flat in this environment.

[Jurgis]

In order to keep productions flat, CHK needs to spend roughly 2 billion. Productions flat = revenue flat in this environment.

 

Right and why do they want to keep production flat? :)

[Wilson-TPC]

To be able to pay the interest cost and SG&A.

[Jurgis]

To be able to pay the interest cost and SG&A.

 

Kinda does not work if they spend more money on drilling than the OCF it produces. ;)

 

I'd assume they could cut production, SG&A, etc.

So are they drilling just to keep status quo?

 

I understand if they have to drill so that they don't lose the properties/rights.

But that's not what you are saying.

 

Ref to 10Q: http://www.sec.gov/Archives/edgar/data/895126/000089512615000203/chk-20150630_10q.htm

I find capitalizing interest rather funny.

 

[Wilson-TPC]

To be able to pay the interest cost and SG&A.

 

Kinda does not work if they spend more money on drilling than the OCF it produces. ;)

 

I'd assume they could cut production, SG&A, etc.

So are they drilling just to keep status quo?

 

I understand if they have to drill so that they don't lose the properties/rights.

But that's not what you are saying.

 

Ref to 10Q: http://www.sec.gov/Archives/edgar/data/895126/000089512615000203/chk-20150630_10q.htm

I find capitalizing interest rather funny.

 

Few ways to look at it. The way royalty agreements work, if the company doesn't drill, they will lose it. Simple as that.

 

But in CHK's case, it needs to spend roughly 2 billion, and this is after improvements in operations to keep productions flat. And the reason it needs to keep productions flat is so that the incremental margins will be able to pay the debt interest and SG&A and etc.

 

With OCF at 1 billion and maintenance capex at 2 billion, it's likely that it will be burning 1 bil of cash going forward per year. How long will this commodity cycle last? If it's longer than 3 years, then problems could arise.

 

What's the probability of that?

 

I don't know, but I would advise buying E&P companies where maintenance capex can be covered by OCF. If that's the case, and the management is disciplined about cost cutting, then there's a significantly better chance of survival.

[Jurgis]

OK, I think we are on the same page then. :)

 

Thanks.

[wachtwoord]

This is so incredibly volatile. Traders must be having a field day  ;D

[Eye4Valu]

Looks tempting at these prices I must say

[zippy1]

3Q out

OKLAHOMA CITY (AP) _ Chesapeake Energy Corp. (CHK) on Wednesday reported a third-quarter loss of $4.65 billion, after reporting a profit in the same period a year earlier.

 

The Oklahoma City-based company said it had a loss of $7.08 per share. Losses, adjusted for one-time gains and costs, were 5 cents per share.

 

The results topped Wall Street expectations. The average estimate of 11 analysts surveyed by Zacks Investment Research was for a loss of 13 cents per share.

 

The natural gas company posted revenue of $880 million in the period, falling short of Street forecasts. Five analysts surveyed by Zacks expected $899.8 million.

 

Chesapeake shares have dropped 61 percent since the beginning of the year, while the Standard & Poor's 500 index has increased 2.5 percent. The stock has decreased 65 percent in the last 12 months.

http://finance.yahoo.com/news/chesapeake-reports-3q-loss-121749723.html

[tede02]

Vote of confidence from Lawler. 

 

http://www.insidertradingreport.org/chesapeake-energy-corp-chk-files-form-4-insider-buying-robert-d-lawler-buys-50000-shares/6179994/

[Jurgis]

CHK bonds are currently trading at $.54 on a dollar or so. YTM 20% or so. Equity is a lottery ticket at this point. You might as well buy bonds.

 

Disclosure: I have a small position in CHK bonds.

[sampr01]

CHK bonds are currently trading at $.54 on a dollar or so. YTM 20% or so. Equity is a lottery ticket at this point. You might as well buy bonds.

 

Disclosure: I have a small position in CHK bonds.

 

Do you have CUSIP ?Thanks

[Jurgis]

165167BU0

165167CC9

165167CF2

165167CG0

 

165167CJ4 - in case someone wants short term paper that goes to 3/2016. Lower yield, likely lower risk too.

 

Some of these are at >24% YTM, but might be tough to buy.

 

Make no mistake: CHK is risky.

[sampr01]

165167BU0

165167CC9

165167CF2

165167CG0

 

165167CJ4 - in case someone wants short term paper that goes to 3/2016. Lower yield, likely lower risk too.

 

Some of these are at >24% YTM, but might be tough to buy.

 

Make no mistake: CHK is risky.

 

Thanks. I agree its risky and already down >60% on my common. But not giving up yet.

[benhacker]

This thread is a classic case of what I was referencing in the SHLD thread about capital structure mismatches...

[Picasso]

Those bonds are saying that Icahn made a terrible mistake. 

[Jurgis]

Those bonds are saying that Icahn made a terrible mistake.

 

Actually, Icahn can still outplay both shareholders and bondholders in a number of ways. For example, he could persuade CHK to float secured notes to him that would be senior to both shareholders and bondholders. Of just buy bonds and push for a recap on terms favorable to him. He can play this similar to Marty Whitman or Howard Marks or Prem Watsa - he thinks couple steps beyond just equity-will-recover-and-I'll-be-rich. Small shareholders don't have these kind of opportunities.

 

See XCO - Fairfax bought a bunch of secureds that were floated to soak underwater unsecureds. ;)

[Picasso]

His actions going forward have nothing to do with the mistake he made plowing into the equity. There's not a lot he can do to protect his equity interest. He can do some senior deal that sits in front of other stakeholders, but it throws his initial equity position under the bus as well. And it's not like he's willing to lend at a low cost to massively boost the value of his equity stub.  That might be possible at some point, but not where the equity currently trades.

[tede02]

To me, suggesting that Icahn made a mistake buying the stock is premature.  Perhaps he is optimistic that energy prices will recover and that is essence of his bet.  If oil and or gas prices go up, say 25% within the next year or two, the whole game changes.  Only time will tell I guess.  It will be interesting to look back in 12 months to see if this is the point of maximum pessimism. 

[Jurgis]

His actions going forward have nothing to do with the mistake he made plowing into the equity. There's not a lot he can do to protect his equity interest. He can do some senior deal that sits in front of other stakeholders, but it throws his initial equity position under the bus as well. And it's not like he's willing to lend at a low cost to massively boost the value of his equity stub.  That might be possible at some point, but not where the equity currently trades.

 

I think that a lot of people take that view: Watsa/Whitman/Icahn made mistake investing into X, it does not matter that they subsequently bought senior debt/recapped/etc. These are unrelated and "actions going forward have nothing to do with the mistake he made plowing into the equity".

 

I think that's a shortsighted and incorrect view. Of course, they did not put money into equity to lose it. But they likely considered the fact that if their equity share goes bust, they can make a lot of money via second phase. Contrast this with Joe Shareholder who has no second phase available. Then tell me if risk for Watsa/Whitman/Icahn when taking equity stake is not lower or more attractive. It is heads we win, tails we win in second phase game for them. It is not unrelated at all.

[Picasso]

Icahn or any Mr. Deep Pockets have those options, but they always have those options.  Meaning they can wait for these events to happen and then do some kind of recap.  They don't have to invest in CHK when the future is murky and oil is trading at all-time record highs.  If they decide they're going to invest in the equity, then they think that's where their capital is best treated.  But when you run into these situations where some small group of debt holders are in position to wipe out your investment, that was a mistake no matter how you want to look at it.

 

It's no different then buying up a bunch of stock at $100 and when it's at $0.20, you recap the business and massively dilute your original stake.  You almost always guarantee your initial capital is lost and all that matters is the terms you get on new capital deployed.  Whatever terms Icahn might get on money he throws at CHK, it almost surely create permanent losses for his existing holdings. 

 

To me, suggesting that Icahn made a mistake buying the stock is premature.  Perhaps he is optimistic that energy prices will recover and that is essence of his bet.  If oil and or gas prices go up, say 25% within the next year or two, the whole game changes.  Only time will tell I guess.  It will be interesting to look back in 12 months to see if this is the point of maximum pessimism. 

 

Icahn was just on record as saying he expects further downside in oil/gas.  He pretty much admitted that the recent energy investments were ill timed.  However he had a very successful CVR investment which has paid for all these mistakes.  Bond yields when he invested in CHK were in the 5% region.  They're now at 30% for 2-year bonds.  Sorry but that's not what you want to see if your equity investment is "successful."

 

Anyway I'll probably buy up some of the bonds once I get more comfortable with liquidity and the capital structure.  There's money to be made here somewhere.

[tede02]

Picasso, curious when and where Icahn made the comments you're referencing.  I'm interested to hear what he said.  Thanks.