Chesapeake: The Odd Man Out

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With QE3 in full force, investors have flourished by pouring money into energy companies - at least most of them.  The best-performing firms have been those that have kept their noses clean, and have invested cash wisely.

ExxonMobil (NYSE: XOM), for example, is trading in the mid- $91 range, near its 52-week high of $92.57 - and with a price to earnings of just 9.65.  And even with the run-up, the company’s dividend remains strong at 2.5%.  Exxon has done an incredible job managing its cash, which has enabled it to open up its coffers to scoop up rich land in the Bakken Shale in North Dakota.  The Bakken shale play produces 600,000 barrels of oil per day, a 100-fold increase from its old production level of 6,000 barrels per day.

Chevron (NYSE: CVX) is also faring well.  The firm boasts a 3.1% dividend and trades just above $117, just under its 52-week high of $118.53.  Also, the company’s price to earnings ratio is still low, at just 8.7.  Chevron has done well as a result of its strong asset base, and the company continues to ink new deals.  Chevron just signed a deal with Indian state-run Bharate Petroleum Corp., agreeing to provide the Indian company with 10,000 barrels of Nigerian oil each day.  

The path hasn’t been as good with BP (NYSE: BP), who has seen its stock price fall to $42 from its $48.34 high.  BP has been selling assets to save up for a potentially large fine from its 2010 Deepwater Horizon accident.  A recent agreement saw BP selling $5.6 billion of assets in the Gulf of Mexico, though it still plans to invest $4 billion there annually.  No matter, investors can scoop up the stock – with its price to earnings of just 7.9 and its 4.5% dividend – at a reduced price.

These firms have invested their cash wisely, and have used earnings to spur additional investment.

The Odd Man Out

Chesapeake (NYSE: CHK) is the odd man out.  As of October 3, the company has fallen 36% from its 52-week high of $29.87, and the company is beaten down to a 6.35 price to earnings ratio.  The main reason for this decline in price (and ratio) is that Chesapeake’s earnings are being propped up by asset sales. 

According to Chesapeake, CEO Aubrey McClendon has been selling assets feverishly, and plans to sell between $13 and $14 billion this year, much of which will go to pay back the $4 billion term loan the company took out in August, and to accomplish the firm’s goal of reducing its debt by 25% in two years.

Also, two of the firm’s shareholders, Carl Icahn and Southeastern Asset Management, have forced shake-ups.  In June, four members of the board were replaced, and an independent chairman, Archie Dunham, was chosen.

Chesapeake faced rough patches when it boosted its drilling for oil when natural gas prices plummeted.  Also, the company is forecast to have a major deficit between spending and cash flow from operations.  Finally, Chesapeake, which is the second-largest producer of gas besides ExxonMobil, left most of its natural gas plays unhedged, it says. 

But the company has taken steps to improve its dire cash situation.  Chesapeake is stepping away from natural gas for the time being and is focusing on oil and NGL drilling.  NGL (natural gas liquids) is a byproduct of natural gas.  NGLs are separated from natural gas, and they include gases like propane, ethane, and butane.  Also, Chesapeake has decided that it will begin hedging its natural gas positions beginning in late 2012.

Overall, the company is making progress.  The firm has begun selling its land in Michigan, Colorado, Wyoming, Texas, and Ohio, and the company sold a flurry of assets, including about 1.5 million acres in its oil field in West Texas, known as the Permian Basin. 

These sales help shareholders in two ways.  First, they give Chesapeake the necessary cash to continue operations.  Second, they permit Chesapeake to continue investing in the highest-yielding businesses.  The cash going to investment is largely being spent on oil drilling, which right now yields far greater premiums than natural gas.

No doubt these moves will help shareholders – and Icahn – to sleep more peacefully at night, knowing that Chesapeake won’t go bust in the morning, and that it is investing in profitable ventures.  However, Chesapeake is still severely lagging the market.  Companies like BP and Chevron have been able to keep sturdy dividends and to continue expanding drilling and market share.  Chesapeake, on the other hand, is fighting to see another day.

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.

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