vinod1 Posted November 4, 2011 Share Posted November 4, 2011 Market doesn't seem to approve of yet another infinitely high-ROIC leasehold monetization....down over 6% thus far today after rallying to over $30 last night on the Utica shale news. I haven't listened to the CC yet, but I'm assuming it has to do with elevated capex, financing etc, etc. IMO, CHK is a wildly undervalued call option on nat gas returning to marginal cost of around $5 to $6 per mmbtu - the only thing I struggle with is how to invest in an asset play with no catalyst. An oil major could easily cut a $50 or $60 billion check for this thing and still have an average F&D cost below what they have been paying - however, if that was going to happen, I don't see why it hasn't by now given the deals that have already taken place. .... And the CHK struggle continues.... I thought you are worried about another chance of great depression and hence avoid the banks. Dont you think the same logic would dictate avoiding CHK as well? Both are deeply undervalued as long as we avoid GD2. I understand CHK has hard assets but I would think it would be as likely to be wiped out in that scenario as any bank. Is the marginal cost of gas really $5-$6? I thought it is closer to $4 from what I remember reading somewhere. I am trying to learn the O&G space so just wanted to understand your rationale. Thanks Vinod Link to comment Share on other sites More sharing options...
bmichaud Posted November 4, 2011 Author Share Posted November 4, 2011 Is the marginal cost of gas really $5-$6? I thought it is closer to $4 from what I remember reading somewhere. I am trying to learn the O&G space so just wanted to understand your rationale. CHK and others believe NG will rise to bewteen $5 and $6 per mmbtu once held-by-production drilling slows in the coming years. See the attached document by Deloitte's Market Point - provides a good outlook for the NG market. I thought you are worried about another chance of great depression and hence avoid the banks. Dont you think the same logic would dictate avoiding CHK as well? Both are deeply undervalued as long as we avoid GD2. I understand CHK has hard assets but I would think it would be as likely to be wiped out in that scenario as any bank. I'll buy anything at the appropriate price regardless of the macro environment. BAC, C, GS, MS and JPM all possess investment banking units, thus they possess balance sheets that are utterly impossible to analyze and are prone to runs - as demonstrated by the recent MF Global debacle. With BAC for example, I would be more than fine buying it below TBV, IF AND ONLY IF, I could understand the $100B+ of "other assets" AND it was honest about the true value of its stated assets and liabilities. Neither of those conditions are in place, thus under no circumstances will I take a position in BAC, C, GS, MS or JPM. With Wells Fargo, I am simply waiting for it to reach a price that I deem likely to provide a 25% 5-year IRR - if it does in fact reach that price, I will pull the trigger in a big way even if it appears the world is coming to an end. Regarding CHK's balance sheet, as of the most recent b/s figures it is leveraged 2.5 times whereas the banks are leveraged over 10 times, so from the get-go you have a much more manageable leverage situation. CHK also has unproved resources on its books that would fetch higher values than carrying value even under distress (IMO - obviously that can be debated). CHK's assets are hard and have the ability to generate cash flow - they're a claim on actual resources, unlike an i-bank's assets, which can be created with a couple computer inputs (stealing from Donald Yackman's view of banking assets) and would garner nothing in a BK auction (i.e. mortgage servicing rights, overvalued trading positions, etcetera). My problem investing in an asset play such as CHK is that at some point there needs to be cash flow either via a sale of the company or from operations. As you can tell from my original post awhile back on this thread, I struggle with reconciling intrinsic value based on cash flow versus IV based on asset value when there is no catalyst in place for the asset value to be realized - obviously I have still not figured it out. This situation is almost akin, dare I say, to the Level (3) situation - supposedly huge asset value, but zero distributable cash flow and appropriate returns on capital employed. Navigating_a_Fractured_Future.pdfNavigating_a_Fractured_Future.pdf Link to comment Share on other sites More sharing options...
vinod1 Posted November 4, 2011 Share Posted November 4, 2011 bmichaud - Thanks! Link to comment Share on other sites More sharing options...
biaggio Posted November 4, 2011 Share Posted November 4, 2011 I have trouble trusting management here...is he not the same guy who sold maps to company for (?)$12 million, + the same person who got the company to bail him out after he borrowed and bought huge amount of options on the company that expire worthless? re "My problem investing in an asset play such as CHK is that at some point there needs to be cash flow either via a sale of the company or from operations. As you can tell from my original post awhile back on this thread, I struggle with reconciling intrinsic value based on cash flow versus IV based on asset value when there is no catalyst in place for the asset value to be realized - obviously I have still not figured it out. This situation is almost akin, dare I say, to the Level (3) situation - supposedly huge asset value, but zero distributable cash flow and appropriate returns on capital employed." -I am reading, "There's always someting to do"---I just read that Peter Cundill learned the importance of having both earnings/cash flow as well as a MOS(discount) on net asset value. Link to comment Share on other sites More sharing options...
bmichaud Posted November 4, 2011 Author Share Posted November 4, 2011 Biaggio, This is how I look at it. Let's say I owned the only spoon in the world, and the worldwide demand for this spoon created enormous inherent value bc it simply outstripped the supply of spoons. So I'm sitting here with a spoon worth let's say $10B in a sale - but other than selling it, the spoon generates ZERO cash flow. So I'm asset rich but cash flow poor. Applying this extreme scenario to CHK demonstrates my concern - by definition the FV of an asset play is the present value of the proceeds from an eventual sale. That's what makes it so tough to value - it's 100pc based on the terminal value and all kinds of assumptions. So while it's nice to say that CHK's assets or my spoon are currently worth $X based on what they would go for in a sale, that only makes sense if in fact they are sold right now. If a sale does not take place, then an estimate needs to be made as to when the terminal value will be realized. Hope my corny analogy helped. Link to comment Share on other sites More sharing options...
alertmeipp Posted November 4, 2011 Share Posted November 4, 2011 hmm... u pay 30 cents for 1 dollar worth of assets that are going to increase in value in the future. There are finite amount of high quality assets available. Sooner or later, these assets will be turned into cash. I like what they are doing. Link to comment Share on other sites More sharing options...
biaggio Posted November 5, 2011 Share Posted November 5, 2011 I get what you guys are saying. Reassuring if IV is increasing as well (i.e. makes sense that NG will be more valuable in the future) Also makes sense what Cundil said- buy with a discount on Net assets , but also make sure they are earning something on the assets (it makes sense that if you cant make money with a certain asset, then why would another company want to buy that asset) In your example the spoon is worth X amount you can buy for x/2 but also it would be reassuring if it earned $x/12 per year. Link to comment Share on other sites More sharing options...
alertmeipp Posted November 5, 2011 Share Posted November 5, 2011 I get what you guys are saying. Reassuring if IV is increasing as well (i.e. makes sense that NG will be more valuable in the future) Also makes sense what Cundil said- buy with a discount on Net assets , but also make sure they are earning something on the assets (it makes sense that if you cant make money with a certain asset, then why would another company want to buy that asset) In your example the spoon is worth X amount you can buy for x/2 but also it would be reassuring if it earned $x/12 per year. If they re-invest their earning power into more cents on dollar play - why not. Link to comment Share on other sites More sharing options...
bmichaud Posted November 5, 2011 Author Share Posted November 5, 2011 hmm... u pay 30 cents for 1 dollar worth of assets that are going to increase in value in the future. There are finite amount of high quality assets available. Sooner or later, these assets will be turned into cash. I like what they are doing. That's precisely the investment case for CHK - but the $1 of value depends on, 1) the long run value of NG, 2) how soon the terminal value is realized, and 3) the discount rate. Those are a lot of assumptions that make the investment difficult even at a seemingly large discount to FV. Cash is king, and I'd rather be discounting dividends and buybacks over my investment horizon than just one cash flow, i.e. the terminal value. CHK is the perfect opportunity for an activist who can push for a sale and value realization - unfortunately i don't have that type of cash 8) Link to comment Share on other sites More sharing options...
alertmeipp Posted November 5, 2011 Share Posted November 5, 2011 hmm... u pay 30 cents for 1 dollar worth of assets that are going to increase in value in the future. There are finite amount of high quality assets available. Sooner or later, these assets will be turned into cash. I like what they are doing. That's precisely the investment case for CHK - but the $1 of value depends on, 1) the long run value of NG, 2) how soon the terminal value is realized, and 3) the discount rate. Those are a lot of assumptions that make the investment difficult even at a seemingly large discount to FV. Cash is king, and I'd rather be discounting dividends and buybacks over my investment horizon than just one cash flow, i.e. the terminal value. CHK is the perfect opportunity for an activist who can push for a sale and value realization - unfortunately i don't have that type of cash 8) CHK lays out it case really well in its presentation. Another way for CHK to realize value is to split up the company into services co, trusts and E&P. ;D I am dreaming here. Link to comment Share on other sites More sharing options...
bmichaud Posted November 5, 2011 Author Share Posted November 5, 2011 I actually like the case CHK makes for staying integrated in order to control its midstream costs. For well run companies (obviously this can be debated for CHK, but I believe they are run by an incredibly passionate oil guy that lives and breathes the business and very much has his finger on the pulse of the company - anecdotally, I've heard Aubrey holds daily meetings with his top lieutenants, which is pretty cool to me) I like the integrated model - i think it works well for XOM and appears to for CHK as well, unlike a COP, which has had obvious operational issues. hmm... u pay 30 cents for 1 dollar worth of assets that are going to increase in value in the future. There are finite amount of high quality assets available. Sooner or later, these assets will be turned into cash. I like what they are doing. That's precisely the investment case for CHK - but the $1 of value depends on, 1) the long run value of NG, 2) how soon the terminal value is realized, and 3) the discount rate. Those are a lot of assumptions that make the investment difficult even at a seemingly large discount to FV. Cash is king, and I'd rather be discounting dividends and buybacks over my investment horizon than just one cash flow, i.e. the terminal value. CHK is the perfect opportunity for an activist who can push for a sale and value realization - unfortunately i don't have that type of cash 8) CHK lays out it case really well in its presentation. Another way for CHK to realize value is to split up the company into services co, trusts and E&P. ;D I am dreaming here. Link to comment Share on other sites More sharing options...
alertmeipp Posted November 5, 2011 Share Posted November 5, 2011 split won't help efficiency but help the market easier to value the assets. I don't think they will do it anyways. Link to comment Share on other sites More sharing options...
Myth465 Posted November 6, 2011 Share Posted November 6, 2011 McClendon inmo has been beaten up a bit too much over the margin call. I have rarely ever seen a hungrier CEO. A bit more risk aversion would be nice, but these guys are doing big things. I plan on just rolling over my options every year. This will be a grand slam or a dud one day... I have a better grasp of the plan for SD though. Not sure what the overall vision is for CHK but that may have more to do with time watching the investment. INMO the well founder's program is a million times worse than anything else. Link to comment Share on other sites More sharing options...
Myth465 Posted November 7, 2011 Share Posted November 7, 2011 Here is an interesting counter and something I think about here and there. http://seekingalpha.com/article/305755-investors-to-chesapeake-show-us-the-money My biggest problem with the well program is that if you think about it. Management makes more money drilling wells than running the company for shareholders.... Link to comment Share on other sites More sharing options...
bmichaud Posted November 7, 2011 Author Share Posted November 7, 2011 Here is an interesting counter and something I think about here and there. http://seekingalpha.com/article/305755-investors-to-chesapeake-show-us-the-money My biggest problem with the well program is that if you think about it. Management makes more money drilling wells than running the company for shareholders.... Great article, thanks Myth. A market-neutral energy HF manager I know has told me in the past Aubrey is a sleezeball, and this article kind of reiterates that. Though I will say, I can't imagine many saw the drop in NG prices back then. Confusing story that's for sure... Link to comment Share on other sites More sharing options...
Myth465 Posted November 8, 2011 Share Posted November 8, 2011 The one thing I dont like is it seems like there is a rather straight forward way to provide value to shareholders. Sell some land / producing assets and pay off the debt. Then sell a bit more and drill, then rinse and repeat. Or sell the company to a major. Either or works. The issue is you wont be the number 1 natural gas company and wont be drilling as many wells for the founders program. Longleaf and the new directors though should be inching CHK towards some sort of value maximization program. Link to comment Share on other sites More sharing options...
bmichaud Posted November 8, 2011 Author Share Posted November 8, 2011 I'm shocked there hasn't been more activism in this thing. It's RIPE for asset sales in this environment with the big guys paying $10,000+ per acre right now. Divest, divest, divest...build up cash, pay down debt....drill, drill, drill....then load up on more acreage on the cheap in the next down cycle - in other words, BUY LOW, SELL HIGH 8) Link to comment Share on other sites More sharing options...
Myth465 Posted November 8, 2011 Share Posted November 8, 2011 Ya I dont get it. But if you look at his incentives he is doing the right thing, based on his incentives. Long term he is can justify it by saying he is helping shareholders via low price acquisitions. I think he will simply crash the liquids (not oil markets) similar to what happened with Nat Gas... Link to comment Share on other sites More sharing options...
bmichaud Posted November 17, 2011 Author Share Posted November 17, 2011 CHK is going to spin off 20pc of its service business. Not sure how that works - I would think an IPO would be the more typical route. Either way, I think it's a step in the right direction toward unlocking some value there, as I would assume most here would agree. Link to comment Share on other sites More sharing options...
Zorrofan Posted November 18, 2011 Share Posted November 18, 2011 The one thing I dont like is it seems like there is a rather straight forward way to provide value to shareholders. Sell some land / producing assets and pay off the debt. Then sell a bit more and drill, then rinse and repeat. Or sell the company to a major. Either or works. The issue is you wont be the number 1 natural gas company and wont be drilling as many wells for the founders program. Longleaf and the new directors though should be inching CHK towards some sort of value maximization program. Lou Simpson is on the board now isn't he? Was that a move by Longleaf? I agree that there needs to be more done to unlock value, but higher nat gas prices would help. Thats still a few years away though. cheers zorro Link to comment Share on other sites More sharing options...
Poor Charlie Posted November 18, 2011 Share Posted November 18, 2011 Interesting article about Aubrey from Forbes Oct issue: http://www.forbes.com/forbes/2011/1024/feature-aubrey-mcclendon-hero-energy-chesapeake-risk-christopher-helman.html Also for those following Sandridge: http://findarticles.com/p/articles/mi_qn4182/is_20070108/ai_n17108190/ Link to comment Share on other sites More sharing options...
Evolveus Posted November 19, 2011 Share Posted November 19, 2011 Yeah, having Simpson on there is a solid vote in favor of shareholder friendly practices. Here is the SEC link to his latest insider purchase: http://www.sec.gov/Archives/edgar/data/895126/000089512611000281/xslF345X03/edgardoc.xml Link to comment Share on other sites More sharing options...
biaggio Posted November 19, 2011 Share Posted November 19, 2011 Interesting article about Aubrey from Forbes Oct issue: http://www.forbes.com/forbes/2011/1024/feature-aubrey-mcclendon-hero-energy-chesapeake-risk-christopher-helman.html Also for those following Sandridge: http://findarticles.com/p/articles/mi_qn4182/is_20070108/ai_n17108190/ Thanks for posting article. $10,000 bottles of wine---that seems ridiculous to me. Not exactly a value play(the wine that is). What a waste of money. Article does not give me confidence in Aubrey or CHK. I have to admit I read with negative bias towards Aubrey so I may be wrong. Link to comment Share on other sites More sharing options...
Kuhndan Posted November 19, 2011 Share Posted November 19, 2011 Just announced Obama has put a hold on Ohio shale drilling. Wow, hard to believe he did that. Utica was already proving to be a boom for Ohio. Link to comment Share on other sites More sharing options...
Zorrofan Posted November 19, 2011 Share Posted November 19, 2011 Yeah, having Simpson on there is a solid vote in favor of shareholder friendly practices. Here is the SEC link to his latest insider purchase: http://www.sec.gov/Archives/edgar/data/895126/000089512611000281/xslF345X03/edgardoc.xml thanks for the link, good to see Lou adding.... Cheers Zorro Link to comment Share on other sites More sharing options...
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