Will Chesapeake be a New Stock After the McClendon Ordeal?
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Although the hoopla surrounding CEO Aubrey McClendon is calming down a bit, the wake left is still the main news regarding Chesapeake (NYSE: CHK). The stock has come up a bit from its low-point in May, during the heat of the fiasco, but a lot has yet to happen. There will still be lawsuits and there will still be a sale of assets. If Chesapeake is back on a path to stability, it has a long way to go.
The first step to be taken is the replacement of McClendon as the chairman and the replacement of other board members. Although he is being replaced, he will still hold much power and have the ability to call special meetings and sessions. Moreover, it appears that McClendon will remain the CEO of the company. Stepping down was not a voluntary move for McClendon. The impending lawsuits and pressure coming from the Securities and Exchange Commission essentially forced him out.
Then there is the lawsuit. Recently, the firm representing the shareholders sent out a reminder that anybody looking to be a lead plaintiff in the class action suit against Chesapeake has one more week to do so. It will be interesting to see how big this suit becomes.
All of this attracted Carl Icahn to purchase a huge stake in the company. It is unclear exactly what his plans are but one thing is clear; he expects to make money. Needless to say, he would not have put money in the company if he did not envision large returns. Many analysts feel that this is a time to purchase stock. Carl Icahn is probably working along the same line of thinking. Personally, I would keep watching. The company still needs to sell assets to pay a loan. There is a lot riding on this sale.
It has also recently seen a few hiccups. One small but not insignificant hiccup is the restructuring of fracking contracts with about 4,000 land owners in New York. These contracts have been restructured to provide the land owners with more favorable terms due to possible environmental harm caused by fracking. It is worth noting that all of these contracts are in New York state, where there is a lot of cause against fracking. There is much uncertainty concerning fracking in the state. Until it gets resolved it is just one more headache that Chesapeake does not need.
The biggest bit of uncertainty is the sale of its assets though. Chesapeake needs to sell at least $7 billion to make sure it can pay its creditors. McClendon has stated that he is willing to sell upwards of $14 billion. There has been much regarding the sale of its assets. Many believe that this will hold the company back as the assets it plans to sell are among its best.
One of these assets is a pipeline that it will sell for over $4 billion. Additionally it will sell its partner units and interests in Chesapeake Midstream Partners LP for another $2 billion. Over all of the predicted transactions it has secured, it is estimated to raise between $11.5 and $14 billion. This will be enough to get it out of the woods but hopefully not too much to hinder its long term growth prospects.
It certainly doesn't help that Chesapeake's number one rival, ExxonMobil (NYSE: XOM) has been having a very good month. Even though the company just announced that it will need to pull out of its Polish natural gas mining explorations due to poor returns, the stock continues to trend upwards. Much of this comes from the continual good news coming out of its new Siberian ventures. Specifically, Exxon Mobil and its partner Rosneft plan to develop tight oil and gas formations using advanced exploration technology that ExxonMobil currently has.
Also hitting it out of the park is Chevron (NYSE: CVX). Much like ExxonMobil, Chevron has seen steady increases in its stock prices all month. Just recently it announced that it was entering an agreement with Kosmos to explore energy offshore Suriname. In addition it just entered into an agreement to provide Liquid Natural Gas to Tokyo Electric Power Company. These two new partnerships should bring Chevron steady revenue for many years to come. This is also good news to investors as the stock is currently in risk of a downgrade and could use some more good news.
Chesapeake could learn some lessons from smaller U.S. firm SandRidge Energy (NYSE: SD). SandRidge was in a similar position as Chesapeake, being invested in natural gas originally but switching production to oil. In 2008 its revenues were 90% natural gas but today its revenues are 85% oil. This can only occur with good management, something that Chesapeake is currently missing. Even its 15% share of natural gas is beginning to pay off. It made about $75 million more in the first quarter of 2012 than it did in the first quarter of 2011 off of natural gas.
Another small energy company EnCana (NYSE: ECA) has made surprising gains on natural gas of late. More importantly, it is looking to develop a shale deposit that Chesapeake is looking to profit from. If EnCana can efficiently and effectively explore in this region it could be another blow that Chesapeake does not need.
The overall outlook at Chesapeake is not bleak by any means. Actually, given how bad the McClendon-created fiasco initially looked, Chesapeake is doing surprisingly well. That's not to say that Chesapeake is a shining star, but it really could be worse. However, it will need to turn itself around and do it very quickly. There are many exploration companies vying for Chesapeake's spot and many seem more than capable to take it. Expect it to aggressively hold onto its position, but keep an eye on competition. Every additional slip will bring its competition closer to taking its spot.
jordobivona 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.
