CHK - Chesapeake Energy

[Sea Island]

So this Reuters piece should have an unintended positive impact, pre-market trading is not indicating that

[bmichaud]

So this Reuters piece should have an unintended positive impact, pre-market trading is not indicating that

 

 

Not exactly - personally I'm relieved the company is not funding him, as I thought was potentially the case when I saw the accumulated deficit. This is just confirmation of the shorts' concern that Aubrey is shady mother effing bastard.

 

IMO the company is bigger than Aubrey and eventually is a buy. Only reason I haven't bought is my energy friend's concern with the company.

[Sea Island]

It seems to me that the bonds and stock of CHK have decoupled as well with their debt has not sold off really at all.

[alertmeipp]

It seems to me that the bonds and stock of CHK have decoupled as well with their debt has not sold off really at all.

 

So that 2.5% sucks but it's not news.

 

Aubrey uses the well interest to borrow money ... why is this significant..

 

Is the news suggesting EIG gets good deal on pfd because of this?

[Myth465]

i think we knew about the 2.5% but many other holders didnt. CHK has always had dodgy corporate governance, nothing new. But still new lows, I will buy CHK preferreds one day, but it wont be today.

[alertmeipp]

what's the best pfd deal?

[alertmeipp]

http://www.chk.com/Reuters/Pages/index.html

 

 

[Swizzled]

Chesapeake replied to the story. 

 

http://valueinvestorcanada.blogspot.ca/2012/04/chesapeake-responds-to-reuters-article.html

[Myth465]

http://seekingalpha.com/article/509261-chesapeake-response-to-ceo-loan-scandal-is-lacking?source=email_portfolio&ifp=0

 

Thats the best response so far.

 

 

[Sea Island]

I am anxious being long CHK and adding at these levels to see where we are in a week and discuss this will attendants at the Fairfax AGM dinner. To draw a parallel, how does Aubrey's participation in the Founders Well Program compare to expensing stock options and backdating options?

[Ross812]

80+ million shares traded yesterday? This was second only to one day in 2008 when the world was ending a CHK was not going to be able to borrow money anymore. The 2.5% interest in new wells should not have been news to any informed shareholders. The leveraging of shares was but does it really matter what Aubry does with his shares? He got hit with a lot of margin calls in 2008. We know he uses leverage. I think the most important thing we can take from Chesapeake's response is even if Aubry defaults it will not affect the company or shareholders. Aubry is a brilliant and greedy CEO. Investors should know this.

[biaggio]

"it becomes clear the more wells CHK drills, the better for McClendon's personal portfolio even if it jeopardizes the company's financial stability, not to mention shareholder interests.

 

In this light, Chesapeake's incessant need to drill and monetize only to find new plays to drill and monetize could easily be construed as a CEO's attempt to enrich himself, even at the expense of shareholders. Frankly, McClendon has lost the benefit of the doubt and investors may be prudent to assume his personal profit motives may be primary over his corporate duties. After all, we're talking about $1.1B, a heady sum even for today's overpaid CEOs."

 

I don t think I could invest alongside this guy.

[racemize]

"it becomes clear the more wells CHK drills, the better for McClendon's personal portfolio even if it jeopardizes the company's financial stability, not to mention shareholder interests.

 

In this light, Chesapeake's incessant need to drill and monetize only to find new plays to drill and monetize could easily be construed as a CEO's attempt to enrich himself, even at the expense of shareholders. Frankly, McClendon has lost the benefit of the doubt and investors may be prudent to assume his personal profit motives may be primary over his corporate duties. After all, we're talking about $1.1B, a heady sum even for today's overpaid CEOs."

 

I don t think I could invest alongside this guy.

 

This certainly seems like a situation where one of Buffett's quotes apply--the one where you only invest along management you can trust.

[Ross812]

"it becomes clear the more wells CHK drills, the better for McClendon's personal portfolio even if it jeopardizes the company's financial stability, not to mention shareholder interests.

 

In this light, Chesapeake's incessant need to drill and monetize only to find new plays to drill and monetize could easily be construed as a CEO's attempt to enrich himself, even at the expense of shareholders. Frankly, McClendon has lost the benefit of the doubt and investors may be prudent to assume his personal profit motives may be primary over his corporate duties. After all, we're talking about $1.1B, a heady sum even for today's overpaid CEOs."

 

I don t think I could invest alongside this guy.

 

I'm saying this is OLD news! It was approved in 2005! This is not some huge scandal a journalist turned up. I can't believe this story caused 80+ million shares to be traded because it is 7 years old. You need to ask yourself ho this story benefited? I'm not a conspiracy theorist at all, but this smells like a story handed over by a big short seller to me.

[biaggio]

"it becomes clear the more wells CHK drills, the better for McClendon's personal portfolio even if it jeopardizes the company's financial stability, not to mention shareholder interests.

 

In this light, Chesapeake's incessant need to drill and monetize only to find new plays to drill and monetize could easily be construed as a CEO's attempt to enrich himself, even at the expense of shareholders. Frankly, McClendon has lost the benefit of the doubt and investors may be prudent to assume his personal profit motives may be primary over his corporate duties. After all, we're talking about $1.1B, a heady sum even for today's overpaid CEOs."

 

I don t think I could invest alongside this guy.

 

I'm saying this is OLD news! It was approved in 2005! This is not some huge scandal a journalist turned up. I can't believe this story caused 80+ million shares to be traded because it is 7 years old. You need to ask yourself ho this story benefited? I'm not a conspiracy theorist at all, but this smells like a story handed over by a big short seller to me.

 

Good point.

 

All these people that owned these 80 million shares obviously did not read the proxys.

 

Myself, I have never owned CHK, though scanned their SEC filing real fast recently --- these filings (and for most large companies) are quite large and so I am not surprised that few noticed it in their findings (maybe those that noticed are not shareholders i.e. never bought)

[Sea Island]

ROSS is correct on this point, this was not a surprise to anyone familiar with the company. Additionally, for those ready to tar and feather Aubrey, it wasn't that long ago that the "smart money" thought that FRF was a ponzi scheme and that Prem was a self dealing scoundrel. Aubrey has a lot of attoning to do before he reaches the Saint hood level of Prem but the ham handedness of this Reuters "reporting" suggests a coordinated effort to pressure the stock.

[Ross812]

I agree Sea Island. The timing of this Reuters report is just too timely. It seems like they are inventing a scandal out of something that is 7 years old to push the stock price down even further. This is just fanning the flames of the fire started by weak gas prices. This reminds me of the story by an analyst last fall about Petrobakken. For those who don't follow the company. Petrobakken was pushed from $15 to $5 when an analyst called attention to 700 million in convertible debt that had a call option to owners available at the end of 2012. Like CHK, this was old news to the current shareholders. The analyst said the 700 million could not be financed through operations and concluded that the company would have to sell off a lot of land and/or issue millions of shares at under $10/share diluting all current shareholders. The analyst completely neglected to state the debt could be refinanced (it was refinanced, and under a favorable interest rate) and slapped a $7 valuation on the company's stock predicting dilution. Five months later the company is back at $15.

[Ross812]

CHK Guru Ownership form Dataroma:

 

Portfolio Manager                                                       % of portfolio Shares           Recent activity

Mason Hawkins                    - Longleaf Partners                     8.62 27,410,576

Charles K. Bobrinskoy          - Ariel Focus                               4.08 81,400           Add 29.00%

David Carr, Larry Coats        - RS Capital Appreciation Fund   3.99 191,845       Add 30.54%

John W. Rogers                    - Ariel Appreciation                     3.17 1,902,700   Add 20.47%

Ronald H. Muhlenkamp        - Muhlenkamp                             2.60 500,000

[kevin4u2]

I agree Sea Island. The timing of this Reuters report is just too timely. It seems like they are inventing a scandal out of something that is 7 years old to push the stock price down even further. This is just fanning the flames of the fire started by weak gas prices. This reminds me of the story by an analyst last fall about Petrobakken. For those who don't follow the company. Petrobakken was pushed from $15 to $5 when an analyst called attention to 700 million in convertible debt that had a call option to owners available at the end of 2012. Like CHK, this was old news to the current shareholders. The analyst said the 700 million could not be financed through operations and concluded that the company would have to sell off a lot of land and/or issue millions of shares at under $10/share diluting all current shareholders. The analyst completely neglected to state the debt could be refinanced (it was refinanced, and under a favorable interest rate) and slapped a $7 valuation on the company's stock predicting dilution. Five months later the company is back at $15.

 

Ross,

 

Don't allow yourself to be deceived by pretending the old news isn't bad news.  Wishful thinking doesn't alter reality.  Both CHK and PBN are terrible companies.  Anyone with some experience can shoot holes through both the agressive accounting and the valuations given in the corporate presentations. 

 

My recommendation is to avoid both companies.  The both have terrible management and most importantly poor assets (particularly PBN). 

 

If you want to invest in NG why not look first at the lowest cost operators.  That is the only competitive advantage for commodity companies.  This is important because bankers are already starting to rein in revolving loans because the value of the security (reserves) is simply not there.  It's almost a game of chicken with the banks.  Do companies shut in wells because they are uneconomic or not?  If they do shut them in, what do they tell their bankers?  Oh don't worry the assets are still valuable?  I would expect some blood in the streets for high cost producers this summer.  I have even heard that NG may go to zero bid this summer. 

 

Regards,

Kevin

[biaggio]

Kevin, would you wait for the bad news from the high cost producers before buying a low cost producer? I was thinking that things would come to a head sometime before the air conditioning season starts around may or june. Are there any low cost producers that you may be looking at?

[kevin4u2]

Kevin, would you wait for the bad news from the high cost producers before buying a low cost producer? I was thinking that things would come to a head sometime before the air conditioning season starts around may or june. Are there any low cost producers that you may be looking at?

 

That's the $64 question.  If gas prices stay low for the year it will be tough for many producers.  AECO has averaged $2.07/mcf YTD and has been around $1.60/mcf lately .  No dry gas producer is making money full cycle at those prices. 

 

In Canada I like Peyto (PEY) and Encana (ECA).  Peyto is the lowest cost operator in Canada.  Peyto has a shareholder friendly culture, and excellent management focused on generating high returns.  Total cash costs at Peyto is around $1.35/mcfe.  Even at a zero gas price, Peyto will realize a little under $2/mcfe from just the liquids.  They may also be among the few profitable gas producers in Canada in Q1, albeit very marginally (excluding hedges). 

 

ECA is well hedged for this year and will be fine also.  The only canadian equity Vito Maida own's in the Horizon's NA Value ETF is Encana.     

 

In the US, Ultra Petroleum (UPL) has always been among the lowest cost operators. 

 

Good Luck. 

 

Kevin

[biaggio]

Kevin, would you wait for the bad news from the high cost producers before buying a low cost producer? I was thinking that things would come to a head sometime before the air conditioning season starts around may or june. Are there any low cost producers that you may be looking at?

 

That's the $64 question.  If gas prices stay low for the year it will be tough for many producers.  AECO has averaged $2.07/mcf YTD and has been around $1.60/mcf lately .  No dry gas producer is making money full cycle at those prices. 

 

In Canada I like Peyto (PEY) and Encana (ECA).  Peyto is the lowest cost operator in Canada.  Peyto has a shareholder friendly culture, and excellent management focused on generating high returns.  Total cash costs at Peyto is around $1.35/mcfe.  Even at a zero gas price, Peyto will realize a little under $2/mcfe from just the liquids.  They may also be among the few profitable gas producers in Canada in Q1, albeit very marginally (excluding hedges). 

 

ECA is well hedged for this year and will be fine also.  The only canadian equity Vito Maida own's in the Horizon's NA Value ETF is Encana.     

 

In the US, Ultra Petroleum (UPL) has always been among the lowest cost operators. 

 

Good Luck. 

 

Kevin

 

Thanks

[Myth465]

 

Ross, Don't allow yourself to be deceived by pretending the old news isn't bad news.  Wishful thinking doesn't alter reality. 

 

Agreed. This is old news, but explains CHK's drill baby drill strategy. Its one thing if he is putting up 2.5% in cash, its another if he is just borrowing against the assets, and has no downside but complete upside. How is he going to cap an unprofitable well, if he needs that income stream to pay the debt.

 

This is news, dont kid yourself. The plan made it seem like Aubrey paid 2.5% for each well, which really encouraged him to select the best wells and only economic wells. With this situation he doesnt really need to care. The reaction is overblown, but its news.

[alertmeipp]

you think Aubrey has the cash to drill all those well? Plus why would Aubrey drill uneconomical wells because of this?

 

Some views on CHK:

 

http://blogs.barrons.com/stockstowatchtoday/2012/04/19/chk-bofa-still-says-buy-sterne-agee-is-cautious/?mod=google_news_blog

[Myth465]

Well if you are buying 2.5% of every well. I would think you would have the cash since you pushed the program. I didnt expect he would simply borrow against the wells, and have upside with $0 skin in the game.

 

The incentives explain why CHK continues to buy acreage and drill regardless of prices or funding. His incentive is to maximize the number of wells. When you maximize the number of wells, and continue to sell hedges, you can find yourself in a situation where you have drilled the price of gas down to nothing.

 

The incentives are all screwed up here.