Chesapeake Continues Shedding its Debt Skin

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

The second largest American natural gas producer Chesapeake Energy (NYSE: CHK) is still in the process of disposing of assets, which has its finances stretched to the limit.  Chesapeake’s debt to equity ratio of 105.8% and current ratio of 0.56 reveal a company whose financial position is still extremely delicate – and that’s putting it delicately for a company short on cash and laboring under a $16.2 billion pile of debt. The company’s stock has fallen by a quarter this year, plunging its market cap to around $11 billion.

In the second week of December, Chesapeake revealed that it was going to sell its natural gas midstream assets used to gather, process and market the fuel for $2.16 billion to Access Midstream Partners LP (NYSE: ACMP), the same firm that purchased most of Chesapeake’s lucrative infrastructure assets earlier this year after Chesapeake had already sold its joint venture with Access, called Chesapeake Midstream, to GIP. This current deal focuses on a 1,700 mile pipeline with 50 natural gas gathering units, all located in Ohio, Oklahoma, Pennsylvania and Texas.  

By Q1-2013, Chesapeake will sell its remaining midstream assets for $425 million. In addition, the company has also sold other infrastructural assets in the current quarter for $175 million, including the sale of its assets in the Eagle Ford basin – 40 miles of pipeline, 315,000 barrels of storage capacity – to Plains All American Pipeline (NYSE: PAA) for $125 million. According to its own estimate, Chesapeake will raise $4.9 billion by selling all such assets and given the profit potential of those assets; Chesapeake has not faced any shortage of buyers. It has also sold its Permian Basin assets for $6.9 billion to Royal Dutch Shell and Chevron. The company’s total asset sale in 2012-13 is going to generate around $19 billion total. Chesapeake is also cutting down its staff and offering buyouts to hundreds of its employees.

Through its current string of disposals, it is going to generate some premium -- the most recent sales to Access and Plains All American notwithstanding, which went for less than analyst’s expectations; but the real benefit in the long term will go to the buyers who are investing in the company’s midstream assets, which will be used to transport shale from the rocky mountains to power plants.

Chesapeake’s problems have come from its top management and its inability to forecast the slump in natural gas prices.  Its rise and fall is an object lesson that timing your investments is as important as what you invest in.  The best fundamental analysis and research is no match for being over-leveraged at the wrong time.  Options and futures traders know this and Chespeake’s management should have known it as well.  For long term investors in the company, natural gas prices will stabilize and rise in the coming years.  The prices being paid in Asia are proof positive of this.  The current problem for Chesapeake and most North American producers is not the demand but the supply of transportation infrastructure needed to get the gas to consumers willing to pay the premium for it. 

In the meantime, the third biggest U.S. pipeline company, Williams Companies (NYSE: WMB), is purchasing a significant stake in Access Midstream for $2.4 billion, which includes 50% of GIP’s stake in Access’s general partner and a 25% stake in ACMP. With its current investments, Williams will not only significantly improve its already impressive asset portfolio of transportation of unconventional gas production but will likely improve its lucrative dividend yield of 4.13%. The company has secured a $2.5 billion loan for the acquisition and will sell an additional 46.5 million shares to finance the deal. The transactions are expected to close within the few remaining days of 2012.  In the coming shale gas and oil boom emanating from North America it will be those that transport, store and refine the energy we all use that will make the most money, not the ones who have to sink billions into ripping it out of the ground.

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>Chesapeake</strong></p> </td> <td> <p><strong>Williams</strong></p> </td> <td> <p><strong>PAA</strong></p> </td> <td> <p><strong>ACMP</strong></p> </td> </tr> <tr> <td> <p><strong>Stock YTD</strong></p> </td> <td> <p><strong>-25.71%</strong></p> </td> <td> <p><strong>-4.62%</strong></p> </td> <td> <p><strong>+22.03%</strong></p> </td> <td> <p><strong>+23.32%</strong></p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>71.24</p> </td> <td> <p>18.88</p> </td> <td> <p>22.27</p> </td> </tr> <tr> <td> <p><strong>EPS</strong></p> </td> <td> <p>-1.2</p> </td> <td> <p>0.44</p> </td> <td> <p>2.37</p> </td> <td> <p>1.46</p> </td> </tr> <tr> <td> <p><strong>Yield</strong></p> </td> <td> <p>2.10%</p> </td> <td> <p>4.10%</p> </td> <td> <p>4.80%</p> </td> <td> <p>5.40%</p> </td> </tr> <tr> <td> <p><strong>ROA</strong></p> </td> <td> <p>2.17%</p> </td> <td> <p>4.58%</p> </td> <td> <p>5.84%</p> </td> <td> <p>4.34%</p> </td> </tr> <tr> <td> <p><strong>ROE</strong></p> </td> <td> <p>-2.65%</p> </td> <td> <p>11.59%</p> </td> <td> <p>17.49%</p> </td> <td> <p>9.55%</p> </td> </tr> </tbody> </table>

 

 


PeterPham8 has no position in any stocks mentioned. The Motley Fool recommends Chevron Corp. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. 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!

blog comments powered by Disqus