Chesapeake Is Getting Lots of Attention: From Analysts, Investors, the SEC and China
by Steve Smith
Apparently neighborhood activists aren’t the only ones concerned with the strategy of Chesapeake Energy. Add analysts, investors and the Securities and Exchange Commission to the list.
According to Reuters report, Chesapeake Energy has loaded up with debt, made big share issues and executed complex, less-than-transparent deals. This at the same time that CEO Aubrey McClendon builds the case that is company’s stock, valued at $49.16 yesterday (and falling) should be priced more like $150 a share.
Analysts are fixated on other things. James Halloran, energy analyst with National City Private Client Group, which owns Chesapeake shares said the company’s profit and loss statement is in constant flux, so investors never really understand what Chesapeake’s costs and revenue are.
Apparently, neither does the U.S. Securities and Exchange Commission. In a July 7 filing with the SEC, Chesapeake said the regulatory agency’s staff had made inquiries on a number of issues including its reserve replacement ratios, the company’s cash situation and a recent volumetric production payment, under which the company sold future natural gas production.
In the first quarter, Chesapeake reported a net loss of $143 million because of its hedging activities, but production — a figure closely tracked by Wall Street — soared 31 percent to 2.2 billion cubic feet equivalent per day.
Still, Chesapeake seems to be cash strapped. An Argus Research analyst has lowered his rating on Chesapeake to “hold” from “buy,” citing worry over the company’s “burgeoning cash needs.” Chesapeake has $13.3 billion in long-term debt as of July 7, leaving the company more exposed if natural gas prices, which have become volatile, tumble. Fitch rates Chesapeake’s debt BB, or speculative, with a rating outlook of “negative.” The big fear is that the natural gas market reaches a point of oversupply, a possibility in an era where many companies are drilling to achieve double digit production growth.
Chesapeake plans to spend $13.5 billion on drilling and leasehold activity in 2008. Where’s that money coming from? Well, maybe China as we mentioned yesterday. China National Petroleum Corp. (CNPC), the state owned oil and gas company of the People’s Republic of China, wants to get a piece of the action in the Fayetteville and Marcellus Shale plays that could be worth $1.6 billion. Considering that natural gas drilling is sold to us in part as a patriotic, national security endeavor, doesn’t taking investments from the CNPC, which does business with class acts like Myanmar, Sudan and Venezuela seem contrary to that position? Why not ask Iran for some money while you’re at it Aubrey?
In a post-Enron world, a lack of transparency makes investors nervous. When quarter after quarter, a company dilutes shareholders value with new debt and issuing new shares, it doesn’t matter how great your earnings are. Investors will ask more and more questions. And flying American flags from your rigs while cutting deals with companies that do business with dictatorships is hypocritical at best. And at worst …? Who knows?
Tags: Aubrey McClendon, Barnett Shale, Chesapeake Energy
8 Comments, Comments or Pings
Charles
In the oil and gas industry Chesapeake is known as “The Evil Empire”.
Aug 31st, 2008
BigM
Great article. I am in the industry but are these guys the next Enron?
Sep 3rd, 2008
Steve-O
Chesapeake and BP America announced a joint venture on Tuesday in which BP will acquire a 25 percent interest in Chesapeake’s Fayetteville Shale assets in Arkansas for $1.9 billion. Would that take CNPC out of the running for a stake in a U.S. Shale play? Maybe not. Chesapeake CEO Aubrey McClendon told investors in a conference call Tuesday that the company’s next partner would likely be a big company “not domiciled in the U.S.” Hmmmm.
Sep 3rd, 2008
Steve-O
Aubrey McClendon on CNPC: “No comment.”
Sep 4th, 2008
sirius_girl
no need to worry FW - when this scenario is in the works!
Okay, after last night - enough with the sarcasm.
let’s try this:
Yikes! I thought I was worried before.
“Those purchases, as well as the high costs of drilling in shale, have prompted Chesapeake to sell part of their holdings to raise cash and reduce their risk.
Chesapeake also has said it was mulling a potential spin-off of its midstream gas assets, which process and ship the fuel to trading hubs.”
Sep 4th, 2008
Steve-O
That’s why Chesapeake is plowing through neighborhoods using eminent domain. They want their own pipeline network that they can sell someday. Screw what’s best for the neighborhoods, this is about make Aubrey money. Whether it means tearing down houses or selling a stake of their holdings to China, CHK seems willing to do it.
Sep 4th, 2008
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