This Energy Titan Faces 3 Major Risks

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

In my article “Chesapeake Faces 3 Daunting Risks,” I explained that Chesapeake (NYSE: CHK) has three major risks that could prevent the company from turning around.  The article explained risks in oilfield shortages, gas price volatility and hedging, and cash flow concerns.

In this article I add to those concerns, detailing Chesapeake’s high interest burden, large CAPEX, and potential regulatory challenges.

High-Rate Borrowing

Even with interest rates and treasury yields hovering near extreme lows, Chesapeake’s borrowing costs run high.  According to Chesapeake’s November Investor Presentation, the company has a host of publicly-traded debt with high interest rates.  Among the top rates are its 7.625% Senior Notes due in 2013 and its 9.5% Senior Notes due in 2015.  The company does not list any publicly-traded debt due in 2014.

With cash and profit struggles, Chesapeake must find a way – aside from the short-term fix of selling mature assets – to get its hands on cash that won’t “break the bank.”

Chesapeake already saw some success selling assets.  It sold its assets in the Permian Basin to a group including energy giants Shell (NYSE: RDS-A) and Chevron (NYSE: CVX). This is a positive for the two companies, which are able to buy assets at a time when decreased natural gas prices and Chesapeake’s need for cash have produced favorable buying conditions.


Chesapeake’s high capital expenditures reflect the company’s move from natural gas extraction toward the more profitable oil.  Note the growth chart below, and how Chesapeake’s absolute growth in U.S. liquids has surged compared to competitors.

<table> <tbody> <tr> <td colspan="4">Capital Expenditures</td> </tr> <tr> <td> </td> <td>2011</td> <td>2010</td> <td>2009</td> </tr> <tr> <td>ConocoPhillips</td> <td> 13,266,000</td> <td>   9,761,000</td> <td> 10,861,000</td> </tr> <tr> <td>Chesapeake</td> <td> 14,450,000</td> <td> 13,513,000</td> <td>   7,523,000</td> </tr> <tr> <td>Shell</td> <td>26,301,000</td> <td>26,940,000</td> <td>26,516,000</td> </tr> <tr> <td>Chevron</td> <td> 26,500,000</td> <td> 19,612,000</td> <td> 19,843,000</td> </tr> <tr> <td>Exxon</td> <td>30,975,000</td> <td>26,871,000</td> <td>22,491,000</td> </tr> <tr> <td>*Numbers in Thousands</td> <td> </td> <td> </td> <td> </td> </tr> </tbody> </table>

Also, see the company’s capital expenditures compared to competitors Shell, Chevron, ExxonMobil (NYSE: XOM), and ConocoPhillips (NYSE: COP).  Also note that Shell, Exxon, and ConocoPhillips are planning a $65 billion project in Alaska’s North Slope, which is not reflected in the past results.  The firms hope to obtain permission from the government to export natural gas to nations without free trade agreements, where they can obtain a natural gas price that is multiples higher than the price in the U.S.


Any new regulation on large drillers is anybody’s guess.  It is no secret that the current administration is partial to alternative energy sources and clean energy, as it takes drillers twice as long to obtain permits on federal lands.

The government, for example, could potentially not give permission to Shell, Exxon, and ConocoPhillips to export natural gas to overseas nations.  Also the government could place restrictions on fracking, a risk that Chesapeake references in its November Investor Report.

Despite all of its business and market risks, including crushing debt and low natural gas prices, unfavorable regulation poses a similar or potentially greater threat because Chesapeake can neither anticipate nor hedge it. 


As I mentioned in my first article about Chesapeake’s risks, the company’s stock price has been beaten down by the flurry of negative circumstances affecting the company.  The threat of a near-term market pullback could shrink the stock price even further, because the market sometimes punishes companies with high debt loads during downturns.

However, any price decrease would provide bullish investors with a favorable entry point into the stock.  And if Chesapeake is able to cut its debt and keep investing in its most profitable areas, then the stock could participate in any bull run for the overall market as well as for natural gas and oil.  For those that have watched Chesapeake shrink in value, that is an encouraging proposition.

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 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, and short JAN 2014 $15.00 puts 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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