When Will it Finally Run Out of Assets?
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“We are taking aggressive and focused actions to increase cash flow and net asset value per share while also reducing long-term debt,” Chesapeake Energy (NYSE: CHK) CEO Aubrey McClendon said, and “we are prudently deploying our capital as we focus on developing and harvesting the 10 core plays in which Chesapeake has built a #1 or #2 position.”
Mr. McClendon speaks the truth. So far this year, Chesapeake has continued to deploy capital, although it may not always be its own capital. As of early August Chesapeake had invested $6.7 billion in leasing and drilling for the year, compared with just $1 billion cash brought in from operations. Chesapeake often finances projects through debt, joint ventures, and off-balance sheet financing, but the 10-year low for natural gas has compounded Chesapeake’s financing problems. So Mr. McClendon is on target with his investment thesis of “prudently deploying our capital as we focus on developing and harvesting the 10 core plays,” although some may disagree with the “prudently” part.
Now how about the “reducing long-term debt” thesis?
Chesapeake has approximately $14.3 billion in long-term debt, a jump of 9.5%. However, Chesapeake claims that it will still be able to cut its debt down to $9.5 billion and still meet the “25/25” goal it announced this past January.
Chesapeake has been facing cash flow problems that more traditional oil and gas firms have mostly escaped. Firms like ExxonMobil (NYSE: XOM), BP (NYSE: BP), and Chevron (NYSE: CVX) have more stable business models and pay higher dividends, like BP’s 4.5% dividend yield. Also, these companies are far more slanted towards oil exploration, drilling, refining, and storage.
The natural gas low, for example, didn’t hit ExxonMobil or Chevron nearly as bad as Chesapeake, because while those two companies have more traditional capital structures, Chesapeake is leveraged to the hilt. And like buying stock on margin, when times go bad there is blood in the streets (recall that Chesapeake’s share price has traded from $33.87 to $13.32 during the past 52 weeks.)
More Asset Sales
So how does Chesapeake make it right now? Raise more cash. Initially the company planned to sell $11.5 billion in assets, but McClendon announced that the company would aim for 2012 asset sales somewhere between $13 and $14 billion, an increase of up to 21.7%.
The asset sales have produced positive earnings for Chesapeake, giving the firm a $949 million profit last quarter, but only $3 million of that came from earnings other than asset sales or noncash gains. There are more asset sales planned for the future, as Chesapeake expects to sell another $7 billion in assets in the third quarter.
The company has been diligent in this area, already signing a Purchase and Sale agreement with EnerVest Ltd., which would unload three asset packages to EnerVest. Chesapeake would be selling part of its 1.5 million acres of its Permian oil field, located in West Texas.
Overall, Chesapeake is doing a nice job raising cash in this tough natural gas market, and its asset sales have been able to preserve the company’s stock price, which has risen from the $13 area up to around the $19 mark.
For the future, Chesapeake looks to be on solid footing – meaning it likely won’t go bust. If natural gas continues to weaken, the company could continue to sell its growing stockpile of investments, and if natural gas takes off, Chesapeake’s leverage puts it in perhaps the best position to capitalize on the price move. That leverage makes Chesapeake a calculated risk taker’s (gambler’s) dream.
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.