CHK - Chesapeake Energy

[Grenville]

http://finance.yahoo.com/news/chesapeake-energy-corporation-enhances-financial-231900259.html

 

Chesapeake Energy announced it has entered into a $3.0 billion unsecured loan from Goldman Sachs Bank USA and affiliates of Jefferies Group, Inc. The net proceeds of the loan, after payment of customary fees and original issue discount (if any), will be utilized to repay borrowings under the company’s existing corporate revolving credit facility.

 

The new facility, which ranks pari passu to Chesapeake’s outstanding senior notes, matures on December 2, 2017 and may be repaid at any time this year without penalty at par value and carries an initial variable annual interest rate through December 31, 2012 of LIBOR plus 7.0%, which is currently 8.5%, given the 1.5% LIBOR floor in the loan agreement. During the remainder of the year, Chesapeake plans to complete asset sales totaling $9.0-$11.5 billion and intends to use a portion of the proceeds from these asset sales to repay the loan. Chesapeake has received strong interest from prospective buyers of its Permian Basin asset sales process and its Mississippi Lime joint venture process, and the company expects to complete these two transactions in the 2012 third quarter.

 

Interesting to see Jefferies involved in the financing. I wonder if the affiliate is Jefferies High Yield Holdings and maybe they'll syndicate it off to Leucadia.

[alertmeipp]

this plus the resolver they have should give them enough time to close the required deals.

 

These coordinated attacks from press is amazing. Too bad this and SD trade really suck this year.

 

[alertmeipp]

at this point, Aubrey should just sell even more assets to buyback the stock. He can drive NAV to 100+ bucks and without debt, he can sit on the rest of assets.

 

Time to show us those assets really worth something.

 

Aubrey, sell 60 cents dollar (Assets) and buy 20 cents dollar (stock) NOW.

[Zorrofan]

I hope the Southeastern folks have a plan.

 

I strongly second that! Is anyone adding at this point?

 

cheers

Zorro

[bmichaud]

Am I missing something here regarding VPPs? So CHK has let's say 500 BCF of future production that it wants to monetize, a financial investor offers to pay $4 per MCF and shells out $2 billion. Once CHK receives those monies - this is where the confusion lies - the only committment CHK has going forward is to meet its production quota, is it not? If gas went to $0 the onus is on the financial investor to hedge that risk. And likewise, if gas went to $10 CHK wouldn't receive anything over and above the $4.

 

Someone please correct me on this because I'm tired of reading about how it is really OBS debt. The only way it could be deceiving is if CHK is not deducting the future production tied to VPPs from its production and reserve calculations.

 

.....

 

BTW, buying back stock here would be asinine for market confidence and debt covenants. The same reason BAC should not buyback stock here - they need to build cash, confidence and the ability to grow without diluting existing shareholders.

[alertmeipp]

Am I missing something here regarding VPPs? So CHK has let's say 500 BCF of future production that it wants to monetize, a financial investor offers to pay $4 per MCF and shells out $2 billion. Once CHK receives those monies - this is where the confusion lies - the only committment CHK has going forward is to meet its production quota, is it not? If gas went to $0 the onus is on the financial investor to hedge that risk. And likewise, if gas went to $10 CHK wouldn't receive anything over and above the $4.

 

Someone please correct me on this because I'm tired of reading about how it is really OBS debt. The only way it could be deceiving is if CHK is not deducting the future production tied to VPPs from its production and reserve calculations.

 

.....

 

BTW, buying back stock here would be asinine for market confidence and debt covenants. The same reason BAC should not buyback stock here - they need to build cash, confidence and the ability to grow without diluting existing shareholders.

 

I think your understand of VPP is correct.

Re: buyback - if they sell Permian, Miss Line, Utica and maybe Eagle - they can arguably get 25-30 billion (conservatives # if you take other transaction prices seriously). Paid off all debt, move 5 billions to drilling plan, they still have 5-10billions left... 5billions is 50% of the equity, they can still have billions cash in the bank to support day-to-day operation.

 

Compare to BAC is apple to orange, they are not financial institution, they don't need to carry capital to support their balance sheet (withstand carryoff, etc..)

 

But when u get a possible cash crunch like that, it's a risky thing.

[alertmeipp]

I hope the Southeastern folks have a plan.

 

I strongly second that! Is anyone adding at this point?

 

cheers

Zorro

 

I did. Don't tell my wife.  :-X

Main concern for me is the perceived weakness of oil price.

[bmichaud]

Am I missing something here regarding VPPs? So CHK has let's say 500 BCF of future production that it wants to monetize, a financial investor offers to pay $4 per MCF and shells out $2 billion. Once CHK receives those monies - this is where the confusion lies - the only committment CHK has going forward is to meet its production quota, is it not? If gas went to $0 the onus is on the financial investor to hedge that risk. And likewise, if gas went to $10 CHK wouldn't receive anything over and above the $4.

 

Someone please correct me on this because I'm tired of reading about how it is really OBS debt. The only way it could be deceiving is if CHK is not deducting the future production tied to VPPs from its production and reserve calculations.

 

.....

 

BTW, buying back stock here would be asinine for market confidence and debt covenants. The same reason BAC should not buyback stock here - they need to build cash, confidence and the ability to grow without diluting existing shareholders.

 

I think your understand of VPP is correct.

Re: buyback - if they sell Permian, Miss Line, Utica and maybe Eagle - they can arguably get 25-30 billion (conservatives # if you take other transaction prices seriously). Paid off all debt, move 5 billions to drilling plan, they still have 5-10billions left... 5billions is 50% of the equity, they can still have billions cash in the bank to support day-to-day operation.

 

Compare to BAC is apple to orange, they are not financial institution, they don't need to carry capital to support their balance sheet (withstand carryoff, etc..)

 

But when u get a possible cash crunch like that, it's a risky thing.

 

 

Well yes of course. But if they completed those transactions the stock would double before they could buy anything back. I'm just saying that with current resources it would be a death knell. Regarding the BAC comp - they have debt covenants that require certain debt to capital ratios, so if they go out and reduce equity by 50% they would be in default, especially with the EBITDA denominator currently under pressure for other debt ratios.

[ExpectedValue]

Someone please correct me on this because I'm tired of reading about how it is really OBS debt. The only way it could be deceiving is if CHK is not deducting the future production tied to VPPs from its production and reserve calculations.

 

Really? You have $1.4bn in liabilities that weren't disclosed on the balance sheet. Plus, in at least some of the VPP deals, you have the titles of those reserves fenced off away from CHK creditors in a bankruptcy. That's a pretty big deal when you're trying to look at a company with negative operating cash flow to figure out what kind of financial stress they'll be under over the next few years.

[alertmeipp]

Am I missing something here regarding VPPs? So CHK has let's say 500 BCF of future production that it wants to monetize, a financial investor offers to pay $4 per MCF and shells out $2 billion. Once CHK receives those monies - this is where the confusion lies - the only committment CHK has going forward is to meet its production quota, is it not? If gas went to $0 the onus is on the financial investor to hedge that risk. And likewise, if gas went to $10 CHK wouldn't receive anything over and above the $4.

 

Someone please correct me on this because I'm tired of reading about how it is really OBS debt. The only way it could be deceiving is if CHK is not deducting the future production tied to VPPs from its production and reserve calculations.

 

.....

 

BTW, buying back stock here would be asinine for market confidence and debt covenants. The same reason BAC should not buyback stock here - they need to build cash, confidence and the ability to grow without diluting existing shareholders.

 

I think your understand of VPP is correct.

Re: buyback - if they sell Permian, Miss Line, Utica and maybe Eagle - they can arguably get 25-30 billion (conservatives # if you take other transaction prices seriously). Paid off all debt, move 5 billions to drilling plan, they still have 5-10billions left... 5billions is 50% of the equity, they can still have billions cash in the bank to support day-to-day operation.

 

Compare to BAC is apple to orange, they are not financial institution, they don't need to carry capital to support their balance sheet (withstand carryoff, etc..)

 

But when u get a possible cash crunch like that, it's a risky thing.

 

 

Well yes of course. But if they completed those transactions the stock would double before they could buy anything back. I'm just saying that with current resources it would be a death knell. Regarding the BAC comp - they have debt covenants that require certain debt to capital ratios, so if they go out and reduce equity by 50% they would be in default, especially with the EBITDA denominator currently under pressure for other debt ratios.

 

of course, with the current resources, they can't and shouldn't. BAC - on top of normal debt covenants, there are additional concerns, like they need to build way above what's needed because of confidence issues.

 

Yes, I agree after some assets sales, the pps will not be the same, but even at 50% higher - they should still deleverage way more than their 25/25 plan if Aubrey wants the market to respect him.

[alertmeipp]

Someone please correct me on this because I'm tired of reading about how it is really OBS debt. The only way it could be deceiving is if CHK is not deducting the future production tied to VPPs from its production and reserve calculations.

 

Really? You have $1.4bn in liabilities that weren't disclosed on the balance sheet. Plus, in at least some of the VPP deals, you have the titles of those reserves fenced off away from CHK creditors in a bankruptcy. That's a pretty big deal when you're trying to look at a company with negative operating cash flow to figure out what kind of financial stress they'll be under over the next few years.

 

They are paying back with NG production. That's like a hedge - only the mark-to-market info is missing. They have done 10 VPPs in last few years, those VPPs allow them to use cash to drill liquid wells. Same effect can be achieved by buying NG swaps, but with swaps, u don't get all cash upfront.

[ExpectedValue]

 

They are paying back with NG production. That's like a hedge - only the mark-to-market info is missing. They have done 10 VPPs in last few years, those VPPs allow them to use cash to drill liquid wells. Same effect can be achieved by buying NG swaps, but with swaps, u don't get all cash upfront.

 

I'm not disputing that they pay back with NG production. Everyone knows that, that's what VPPs are. What I'm saying is that they didn't report the costs associated with actually extracted that NG. That's the issue here, when you add in those costs you end up increasing Chesapeake's cash flow shortfalls. The business consistently generates negative operating cash flow while having substantial/growing cash flow requirements to keep funding itself.

[alertmeipp]

 

They are paying back with NG production. That's like a hedge - only the mark-to-market info is missing. They have done 10 VPPs in last few years, those VPPs allow them to use cash to drill liquid wells. Same effect can be achieved by buying NG swaps, but with swaps, u don't get all cash upfront.

 

I'm not disputing that they pay back with NG production. Everyone knows that, that's what VPPs are. What I'm saying is that they didn't report the costs associated with actually extracted that NG. That's the issue here, when you add in those costs you end up increasing Chesapeake's cash flow shortfalls. The business consistently generates negative operating cash flow while having substantial/growing cash flow requirements to keep funding itself.

 

They did project our their cash flow and shortfalls (and how much asset sales they need), u mean those don't include VPPs?

[bmichaud]

 

They are paying back with NG production. That's like a hedge - only the mark-to-market info is missing. They have done 10 VPPs in last few years, those VPPs allow them to use cash to drill liquid wells. Same effect can be achieved by buying NG swaps, but with swaps, u don't get all cash upfront.

 

I'm not disputing that they pay back with NG production. Everyone knows that, that's what VPPs are. What I'm saying is that they didn't report the costs associated with actually extracted that NG. That's the issue here, when you add in those costs you end up increasing Chesapeake's cash flow shortfalls. The business consistently generates negative operating cash flow while having substantial/growing cash flow requirements to keep funding itself.

 

That answers my question then. If the cost to extract the required VPP production is not included in the current operating structure, then that is highly deceiving. So if reported costs are say $2 per MCF whereas including costs to produce VPP production adds $.50, thats a big difference.

 

Then with the reserves, if CHK is reporting reserves ring fenced for VPP investors as reserves for equity holders that is obviously a big problem.

[bmichaud]

On page 33 of the 10Q the VPP transactions since 2007 are outlined. At origination, total proved reserves ring-fenced for VPP investors was roughly 1.4Tcfe - these are the only reserves VPP investors have recourse to. Proved reserves at FYE 2011 were around 19Tcfe, which obviously doesn't include the enormous unproven resource base CHK possesses. All that to say, from a debt perspective, I see very little downside. From an equity perspective, who knows. I can't imagine Southeastern hasn't done their homework....

 

Personally I think it ends up getting bought out - aren't bigger companies licking their chops right now? Total Proved Reserves at FYE 2011 were let's say 19Tcfe (per latest presentation). Total liabilities as of latest quarter (total liabilities + preferred stock + non-controlling interests) were $29.1B or $1.53 per MCFE. Assuming a $30 per share equity take-out 664MM shares out, TEV per proved reserve is $2.58 or $14.95 on a BOE basis. You get all unproven resources and $4B of current assets for free. The F&D cost of a $30 takeout is insane when factoring in unproven reserves. These JVs would not be occuring if CHK's assets were bunk.

CHK_1Q12_10Q.pdf

[bmichaud]

Icahn is reportedly taking a stake. Hopefully Aubrey is gone.

[Sea Island]

Why do you think it would be good for Aubrey McClendon to be fired as CEO?

[Zorrofan]

Icahn is reportedly taking a stake. Hopefully Aubrey is gone

 

Between Ichan and SEAM the only question is how best to realize value on the assets.  The trust route SD has used obtained some nice pricing - so could a trust be set up for each of the major CHK plays? A series of joint ventures? Or an outright sale. I would imagine SEAM will want a good price, they paid around $30 something IIRC, and they thought it was undervalued at that level so.......should be interesting!!

 

Good luck to all

 

cheers

Zorro

[Myth465]

I think CHK is in a bad position. Its already a very complex company. 7 more trusts which all have claims on the assets and all have drilling requirements isnt really possible inmo. They need to sell assets, and unfortunately have put themselves in a position to sell assets in a bad market. I cant see any CFO in the country getting excited about buying CHK as a whole. Talk about an accounting nightmare....

 

Longleaf has been wrong. They bought when gas was a bit higher, and NAV is now materially lower in a $3 gas world.

[WarrenWatsa]

Icahn last bought CHK in 2010 at $21-23.

 

Reportedly sold most or all of it in low $30s.

 

Icahn stepping in = good sign

 

I think SEAM still feels that CHK is worth at least $25.

[Sea Island]

Myth- the assets they are selling are oil assets, is this a bad market for onshore US oil?

[Zorrofan]

I think CHK is in a bad position. Its already a very complex company. 7 more trusts which all have claims on the assets and all have drilling requirements isnt really possible inmo. They need to sell assets, and unfortunately have put themselves in a position to sell assets in a bad market. I cant see any CFO in the country getting excited about buying CHK as a whole. Talk about an accounting nightmare....

 

Longleaf has been wrong. They bought when gas was a bit higher, and NAV is now materially lower in a $3 gas world.

 

Myth, I am going to respectfully disagree with you. SEAM put in approx. $3 billion into CHK because they saw value there, and I still think there is tremendous value in the assets. AM may not be the best operator but he did acquire some good assets. How do you extract value at this point is the question. Breaking the company up into smaller. high yield trusts would leave seven smaller, easier to understand companies.  The trust structure would allow the assets to be sold into the retail market, where they would get a better price. Gas prices may have bottomed, and in a few years when the US starts exporting gas the prices will rise even higher, so maybe it is a matter of refinancing debt and/or selective asset sales until then. Regardless I am confident Ichan and SEAM will come up with some plan to extract value and it will be interesting to watch what happens....

 

cheers

Zorro

[Zorrofan]

add calls for AM to go...

 

http://www.bizjournals.com/dallas/news/2012/05/14/fund-manager-calls-on-chesapeake-to.html?ana=yfcpc

 

cheers

Zorro

[Myth465]

Myth- the assets they are selling are oil assets, is this a bad market for onshore US oil?

 

The Permian will fetch some serious cash. The Miss JV will as well, but it would be worth more proved out. Giving up oil assets and holding on to gas will be more profitable, but still stinks. I am long term bearish on nat gas, so giving up oil while worth while in this setting isnt great long term. They should focus on selling or spinning off in whole the none oil and gas assets. The drilling rigs, frac equipment, and pipelines / midstream assets should be sold because they will fetch cash, and the market for these is likely still quite good.

 

I would sell the Permian, and most of the none core assets. I have always found the CHK story a bit too complex. Aubrey also seems to want it all, and has wanted to keep most of his empire. Now against the wall things will be sold, but the timing is a bit off. If he was focused on shareholders, he wouldnt have leveraged up the company, and moved into so many spaces. I just dont see downside protection from him.

 

---

 

Ward said the market for trusts is small and they can only be done in small batches. The trusts are great, retail investors get something like a 7% - 9% return over the life (maybe more if oil prices rise) and the company gets cheap drilling capital. I just dont think the market could obsorb 7 billion dollar trusts. I also dont think CHK has the trust of the market and balance sheet to pull it off. The market has to trust you will drill those wells, and exist for the life of the trusts. CHK is already the most complex oil and gas company I have ever seen. Other companies own bits of everyone of their plays, they have sold forward tons of production, they have created other entities which own parts of the play. I just dont see retail and instititons trusting them to be around for 20 years and drilling all of these plays.

 

I also dont see another company wanting to deal with the accounting mess CHK has created. Its more likely that the companies will want to cherry pick assets, such as the Miss via JV or the Permian. I dont see the gas assets fetching a decent return in this environment.

 

Thats why I am annoyed with Aubrey. He continues to walk that tight rope, and never thinks about the downside.

[alertmeipp]

>> Thats why I am annoyed with Aubrey. He continues to walk that tight rope, and never thinks about the downside.

 

he said he is done and we are in now harvest mode.  ;)

I bought into CHK believing in its asset values. So far, same thesis.