CHK - Chesapeake Energy

[txlaw]

The man has been a force for good and he will be remembered as one of the greats in the industry. But he has outlived his usefulness for CHK and its shareholders and his sense of entitlement is truly dangerous.

 

You may be right about this, Plan. 

 

I keep going back and forth on whether or not to keep him.  On the one hand, nobody can promote and do deals like McClendon, so we kind of need him to work his butt off to get these asset sales done at the best possible prices for CHK shareholders.  On the other hand, if he pulls this off without having to sell the entire company, then we're left with a CEO who isn't necessarily useful for harvest mode and that may be hard to keep from getting into trouble.

 

Probably the best thing for McClendon to do for CHK shareholders would be to tell the market that he will: (1) shepherd CHK through the necessary asset sales and shift from mostly dry gas to wet gas, and (2) step down to be replaced with an outside CEO once the harvest era begins. 

 

Then maybe McClendon could  concentrate on some other nat gas related ventures that would benefit CHK and the industry.  Or he could be an industry spokesperson or lobbyist in DC or abroad.  We have to give him some way to redeem himself because I think he might be game for trying to do so.

 

From what I see, I don't know if he thinks about things in terms of redeeming himself.

 

I don't know.  From what I've read, he doesn't seem to be a loot the company type of person.  Instead, he seems to run it like a family company, as mcliu has pointed out.  I mean, if this guy were running a private company where he owned the majority of the stock, we might not be so harsh on him.  After all, if he wanted to hire the "strongest man in the world" for his family business, that would be his prerogative. 

 

So maybe he will try to redeem himself.  He has been lauded by the media in the past, but now he's been cast down.  If he cares at all about his reputation, he might try to show everyone that he's not as bad as everyone says he is and that there is a pile on effect here. 

[Guest hellsten]

ValueX Vail 2012 presentation - Exporting North American Natural Gas, closing the worldwide price disparity:

http://www.scribd.com/doc/98208045/ValueXVail-2012-Greg-Merrill

[valuebull]

The latest edition of the Outstanding Investor Digest (OID) has some excellent in-depth interviews with Southeastern Asset Management / Longleaf Funds' Mason Hawkins and Staley Cates (their firm is the largest shareholder of CHK) and also with Nick Syder of Morris Snyder Management. Both firms are bullish on the investing opportunity CHK provides. If you are a CHK investor, or potential investor, I recommend reading this OID edition. This is the May 25, 2012 issue, and is 68 pages long and is packed with insights.

 

If you are in the NYC area, the Brooklyn Public Library subscribes to OID, you can get free access there.

 

I also see there is a used copy for sale on eBay.

http://www.ebay.com/sch/i.html?_nkw=outstanding+investor+digest+&_trksid=p5197.c0.m627

[Crip1]

Valuebull,

 

I read that OID right when it came out and it compelled me to buy some CHK but now I have to admit that that I’m having second thoughts. The reason being the following story has been widely reported but for those who’ve not seen it:

http://www.reuters.com/article/2012/06/25/us-chesapeake-land-deals-idUSBRE85O0EI20120625?type=companyNews

 

In my professional life, I stress to our group that we must always stay within strict “Legal, ethical and moral boundaries”. The reason is that failure to do so, in addition to the fact that it just feels bad, can ultimately bring down our company. That’s not melodrama, it’s fact. But, beyond that, it simply suits my personality to abide by Buffett’s quote which says essentially that if you make a decision assuming that the decision will be printed in the morning paper for all of your friends and family to see that you will tend to make the right decision.

 

Certainly, we are all innocent until proven guilty, but let’s get real. The folks Fairfax sued are guilty as sin, but most of them have already had the lawsuits dismissed. There’s no guarantee that CHK or Encana will be found guilty, but the smoking gun clearly shows that these folks acted outside of strict legal, ethical and moral boundaries. Now, don’t get me wrong, I’m not naïve enough to think that CHK and Encana are the only O&G companies to collude, similar instances and likely more grievous instances have taken place countless times. But, now that I know this, even though CHK certainly looks substantially undervalued and capable of doubling or tripling over the next year or so, I just feel wrong in holding this, so I’m selling. The money-grubbing-SOB in me hates this decision, but it’s the right thing to do.

 

My question is whether anyone else has these moral dilemmas as they research their stocks?

 

-Crip

 

[Guest hellsten]

The latest Longleaf Partners shareholder letter is out:

http://www.longleafpartners.com/downloads/063012%20Shareholder%20Letter.pdf

 

The letter is short. About half is dedicated to CHK. Here are some good quotes from the letter:

At its lowest point, the stock fell 42% from the end of

March. Almost all of what was reported was previously known,

but the rapid onslaught of stories blurred the lines between

perception and reality

McClendon was recognized as one of only eight public company CEOs who

have been in place for over two decades and have earned a 20%+ yearly return for shareholders over that time.

We go forward at CHK with one of the best and most vested independent

boards that we have seen. They will be well informed and will

make decisions only in the best interests of owners. Combining

the new governance with some of the best physical assets we

have owned makes us enthusiastic to have CHK as a core holding in the Partners Fund.

First, we recognize that in commodity businesses, being a low cost

provider is not enough of an advantage for an overweight

position since the commodity price is subject to going below the

cost of production for an unpredictable period of time.

Second, we learned a lesson that reinforces the importance of being a

long-term investor who tries to work productively with management when change is warranted

[txlaw]

The latest Longleaf Partners shareholder letter is out:

http://www.longleafpartners.com/downloads/063012%20Shareholder%20Letter.pdf

 

The letter is short. About half is dedicated to CHK. Here are some good quotes from the letter:

At its lowest point, the stock fell 42% from the end of

March. Almost all of what was reported was previously known,

but the rapid onslaught of stories blurred the lines between

perception and reality

McClendon was recognized as one of only eight public company CEOs who

have been in place for over two decades and have earned a 20%+ yearly return for shareholders over that time.

We go forward at CHK with one of the best and most vested independent

boards that we have seen. They will be well informed and will

make decisions only in the best interests of owners. Combining

the new governance with some of the best physical assets we

have owned makes us enthusiastic to have CHK as a core holding in the Partners Fund.

First, we recognize that in commodity businesses, being a low cost

provider is not enough of an advantage for an overweight

position since the commodity price is subject to going below the

cost of production for an unpredictable period of time.

Second, we learned a lesson that reinforces the importance of being a

long-term investor who tries to work productively with management when change is warranted

 

Thanks for posting.

[berkshiremystery]

Some interesting news for CHK

 

 

Chesapeake Energy selling some assets for $6.9B

http://finance.yahoo.com/news/chesapeake-energy-selling-assets-6-113407305.html

 

Chesapeake Energy is selling the vast portion of its land and infrastructure in west Texas for nearly $7 billion as the company unloads debt and shifts more of its focus to drilling for oil, rather than natural gas.

[fareastwarriors]

http://video.cnbc.com/gallery/?video=3000123403&play=1

 

 

10 min interview of Aubrey McClendon with.. Jim Cramer.

 

[fareastwarriors]

http://www.cnbc.com/id/49899578

 

Looks like Ichan is upping his stake!

[JRH]

Some speculation from another post that Chesapeake Energy is Pabrai's "90%" stock based on recent comments:

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/mohnish-pabrai-and-guy-spier-on-equity-investing-in-japan-and-beyond/

[muscleman]

http://www.cnbc.com/id/49899578

 

Looks like Ichan is upping his stake!

 

Page couldn't be found. :(

Could you tell me some details?

[gfp]

http://www.sec.gov/Archives/edgar/data/895126/000092846412000295/chksch13damd3111912.htm

[muscleman]

http://www.sec.gov/Archives/edgar/data/895126/000092846412000295/chksch13damd3111912.htm

 

Thanks a lot! Do you know what's the upside? I looked through the presentations but I doubt if at $4 gas, 3x operating cash flow is really that attractive.

If we get $10 gas, we would get about $8 EPS, which will be great. But for $4 gas, I think it will be hard to make any money here.

[T-bone1]

They guys from Longleaf reiterated last week that they believe the NAV is more than $50 per share using $4.50 gas prices and $70 oil.

 

I would watch PXP.  They are going to be selling their Haynesville shale asset in the near future.  PXP essentially bought 20% of CHK's Haynesville position (20% of each lease, not one specific portion).  I think the market will be surprised when they see what MLPs and others are willing to pay for the dry gas assets.

 

I have also heard that Doug Miller (XCO) is looking to be a consolidator in the Haynesville - something he could only do with the blessing and funding of Wilbur Ross. 

 

CHK also has a board meeting on Thursday.  I'm not sure when any decisions the (new) board makes will be announced, but I expect something material.  At a minimum I expect to see much lower spending (capex and opex) going forward. 

[luck]

anyone know if dan loeb's third point has a position in this.  i only see a small position on tracking websites.  a cnbc video indicates he took a larger position earlier this year.  maybe in an international fund?  thanks in advance for any perspectives.

[T-bone1]

I believe Loeb made a very good trade in the CHK bonds and then sold.

 

My recollection is that when there were concerns about CHK's solvency or that is was a fraud, Loeb bought their lowest coupon convertible bonds (something like 2.65% bonds of 2026 that convert at $140 per share) for half off.  At this price, he got a big yield and was able to make a quick bet on things improving at CHK.

 

The brilliant part of the trade was that he bought the lowest coupon, longest duration bonds (which were trading at the biggest discount to par), so if CHK went into Chapter 11 - he was likely to double his money.  This is of course assuming that CHK's assets are worth at least enough to cover the $15B of total debt at the time.

 

I was really impressed at the time with this trade and it reminded me of the Magnetar CDS trade.  I can't recall another investment that would do very well with both sides of an uncertain outcome.

[muscleman]

They guys from Longleaf reiterated last week that they believe the NAV is more than $50 per share using $4.50 gas prices and $70 oil.

 

I would watch PXP.  They are going to be selling their Haynesville shale asset in the near future.  PXP essentially bought 20% of CHK's Haynesville position (20% of each lease, not one specific portion).  I think the market will be surprised when they see what MLPs and others are willing to pay for the dry gas assets.

 

I have also heard that Doug Miller (XCO) is looking to be a consolidator in the Haynesville - something he could only do with the blessing and funding of Wilbur Ross. 

 

CHK also has a board meeting on Thursday.  I'm not sure when any decisions the (new) board makes will be announced, but I expect something material.  At a minimum I expect to see much lower spending (capex and opex) going forward.

 

I searched around LongLeaf's website but couldn't find that. Could you please post a link?

What other Oil and Gas companies do you think may have similar opportunities as CHK?

[luck]

thanks for the insight t-bone.  chk is definitely complicated - pro's and con's and not a clear bet.  what makes me keep looking into it is that it did somehow make it past pabrai's crazy checklist and it was the main thing he added to at a price higher than it is today. 

 

hoping this thread can continue to shed light on the fair value range of the company.

[muscleman]

I believe Loeb made a very good trade in the CHK bonds and then sold.

 

My recollection is that when there were concerns about CHK's solvency or that is was a fraud, Loeb bought their lowest coupon convertible bonds (something like 2.65% bonds of 2026 that convert at $140 per share) for half off.  At this price, he got a big yield and was able to make a quick bet on things improving at CHK.

 

The brilliant part of the trade was that he bought the lowest coupon, longest duration bonds (which were trading at the biggest discount to par), so if CHK went into Chapter 11 - he was likely to double his money.  This is of course assuming that CHK's assets are worth at least enough to cover the $15B of total debt at the time.

 

I was really impressed at the time with this trade and it reminded me of the Magnetar CDS trade.  I can't recall another investment that would do very well with both sides of an uncertain outcome.

 

 

What has to happen for CHK to go down?

CHK is slightly shy of the 14 billion debt reduction target right now?

 

I remember that I looked at CHK in May and June this year, and there is some saying that CHK's CEO aggressively entered some swaps with the banks for $4 per MCF gas for the next 10 years. Is that going to significantly limit the upside?

[T-bone1]

The comments were made at a Longleaf investor lunch - hopefully I am not talking out of school by repeating them.  I believe they were recorded and will be posted at some point.

 

With regard to the ten-year $4 gas swaps, that would be news to me.  The company has sold calls on gas for years to come at around $6, but I believe this was a very efficient way of raising capital.  They got the large call premium up front, which they can invest and compound.  Its possible the call will eventually be worth more than they received for it, but so far CHK has done very well with these (and looks quite smart for doing so).

 

This is not unlike Buffett selling European-style puts on the market, in my opinion.  In any case, CHK only sold these on ~20% of their production if I recall correctly, but perhaps we are speaking about two different things.  Is there somewhere I can read more about this?

 

Thanks

[muscleman]

The comments were made at a Longleaf investor lunch - hopefully I am not talking out of school by repeating them.  I believe they were recorded and will be posted at some point.

 

With regard to the ten-year $4 gas swaps, that would be news to me.  The company has sold calls on gas for years to come at around $6, but I believe this was a very efficient way of raising capital.  They got the large call premium up front, which they can invest and compound.  Its possible the call will eventually be worth more than they received for it, but so far CHK has done very well with these (and looks quite smart for doing so).

 

This is not unlike Buffett selling European-style puts on the market, in my opinion.  In any case, CHK only sold these on ~20% of their production if I recall correctly, but perhaps we are speaking about two different things.  Is there somewhere I can read more about this?

 

Thanks

 

I will try to find it if I can. It has been over six months so it is not easy.

I think chk seems to own a smart team that can forecast gas prices more effectively than most hedge funds?

Selling calls seems to be a dangerous business to be in. how long are the calls into?

I hope not too long.

I have been thinking about betting on the gas recovery for three years. I think chk is probably a very good bet. If price remains low, it's oil production can still buy us time to wait.

What other companies do you think are good gas bet?

[T-bone1]

I will try to find it if I can. It has been over six months so it is not easy.

I think chk seems to own a smart team that can forecast gas prices more effectively than most hedge funds?

Selling calls seems to be a dangerous business to be in. how long are the calls into?

I hope not too long.

I have been thinking about betting on the gas recovery for three years. I think chk is probably a very good bet. If price remains low, it's oil production can still buy us time to wait.

What other companies do you think are good gas bet?

 

I would never invest in CHK for their ability to forecast gas prices, but their track record in doing so is excellent.  Unlike hedge funds, CHK is the most active driller in the country and is involved in the most areas and most wells, so they should have better information on supply than anyone else.  Of course demand (weather) is another story . . .

 

I don't think selling calls on gas is a dangerous business for CHK, because they produce a ton of gas.  They are basically hedging, but instead of entering a forward contract they have simply sold a portion of their upside.  This leaves them exposed to the downside, so it isn't really a hedge, but it gets them money up front.  CHK's logic is basically: "if gas prices rose to $6 per mcf tomorrow, we would be making a bunch of money and shareholders would want us to hedge some of our production, so what's the big deal about selling $6 calls on 20% of what we will produce".  In the meantime, this looks to have been a shrewd bet that more cheap supply would come to market (which CHK would be in a position to know).  Like Buffett's put sale on the market, they have gotten money up front (which can be compounded), and they are winning the bet.

 

CHK discloses what calls they have sold in their financial filings.

 

I don't think anything else is as cheap as CHK, but other good ways to play a gas recovery are:

 

Buy DVN: it's cheap(ish), has good management, a great balance sheet and a lot of production.  I think they get sold in a few years

 

Buy UPL: it has more debt, but I like their assets and management, and its cheap

 

Buy CNX: its cheap(ish), has large cash flow from great coal operations and a lot of decent gas exposure

 

Buy XCO: its cheap and has a touch balance sheet, but Wilbur Ross is involved (see ICO)

 

In short, if you want great assets, you either have to pay up, or accept a weak balance sheet.  I like CHK because the world hasn't realized that their balance sheet isn't weak anymore.

[MYDemaray]

I was really impressed at the time with this trade and it reminded me of the Magnetar CDS trade.  I can't recall another investment that would do very well with both sides of an uncertain outcome.

 

That Magnetar CDS trade was brilliant...and so many people didn't recognize what it was, which was simply a straddle/long-vol trade.  Everyone wanted to make them out as the bad guys.

[T-bone1]

That Magnetar CDS trade was brilliant...and so many people didn't recognize what it was, which was simply a straddle/long-vol trade.  Everyone wanted to make them out as the bad guys.

 

Well they did structure the CDO to fail . . . a CDO that other people bought tranches of based on their assumption that Magnetar would structure it in a responsible manner (i.e. not picking the worst possible constituent assets).

 

Don't get me wrong, I don't think they did anything illegal and I think there should be a lot more buyer responsibility in capital markets, particularly for casino-like products like CDS and falsely safe structured products.

 

That being said, Magnetar built the house specifically in the hopes it would burn down, and other people invested in it based on their mistaken faith in Magnetar's intentions . . . and then it burnt down.  It was brilliant on their part, but there is more to life than parting a fool and his money.

[MYDemaray]

That Magnetar CDS trade was brilliant...and so many people didn't recognize what it was, which was simply a straddle/long-vol trade.  Everyone wanted to make them out as the bad guys.

 

Well they did structure the CDO to fail . . . a CDO that other people bought tranches of based on their assumption that Magnetar would structure it in a responsible manner (i.e. not picking the worst possible constituent assets).

 

Don't get me wrong, I don't think they did anything illegal and I think there should be a lot more buyer responsibility in capital markets, particularly for casino-like products like CDS and falsely safe structured products.

 

That being said, Magnetar built the house specifically in the hopes it would burn down, and other people invested in it based on their mistaken faith in Magnetar's intentions . . . and then it burnt down.  It was brilliant on their part, but there is more to life than parting a fool and his money.

 

True, true.  I guess I was simply thinking about the going long the undervalued mezz tranches and buying CDS and what everyone thought was safe....