Chesapeake Energy (CHK) Shoring Up Balance Sheet

I  commented on Chesapeake Energy (CHK) a few weeks ago so other than a brief Q3 update here, I refer you to that post.

The company’s cash flow is still holding up with OCF in at $1.4B, basically even from last quarter and up about 25% y/y.  CHK is slowly working to cash flow neutral as they only outspent OCF by $300M, compared to over $1.2B  back in 2007.

After the credit crisis, management started paying attention to its balance sheet and liquidity.  Cash jumped to $2B (from zero in Q2) and for the first time since I’ve owned them, their current ratio is over 1.0.  Also, the company drew down the rest of its credit facility ($1B available at Q2 08) and put it into money-market funds, Treasurys, etc., on worries the banks may not have the money when needed.   Keep in mind CHK has roughly $5B in off-balance sheet future obligations due to equipment leases, VPP purchase obligations, etc.

The income statement reflects the huge swings in nat gas prices and the related hedges that CHK have on.  Operating expenses are down slightly from last quarter and on the conference call, that’s a trend that management said should continue as the industry tamps down capacity.

Chesapeake seems to be managing the credit crisis well.  As of the 10-Q filing on Nov 6th, CHK had $800M cash on hand.  Their midstream subsidiary obtained a $460M credit facility, with $378M remaining.  The company also transacted a few small debt redemptions and modifications.

Subsequent to Q3, Chesapeake announced another JV, this time in the Marcellus Shale with Statoil (STO).  This transaction nets them $1.3B cash upfront with STO paying the majority of the exploration costs to exploit the assets up to $2.1B .   I direct readers to the press release for more details.

In summary, management has recognized that the market will continue to punish CHK until its fiscal house is put in order.  CEO McClendon and team are executing the plan to do just that.  In addition to the STO/Marcellus transaction, CHK is still trying to close sale of additional assets in South Texas and another VPP transaction.  Meanwhile, production is humming along — Haynesville has already exceeded previous stated targets of 75 mcfe/day — and proven reserves were down less than one percent despite the various asset divestitures. Impressive.

The Marcellus JV news release points out that implied value of CHK’s interest in the three JV shale plays (Haynesville, Marcellus, Fayetteville) is over $40 per share.  These were transacted in good times earlier in the year as well as just this past week in rocky times.  Incredibly, this excludes CHK’s formidable position in the Barnett as well as its other plays.   CHK closed the week at $21 but I think CEO McClendon has “cracked the code” on getting its share price back up and seems to be well on his way to shoring up the balance sheet.  There’s also some talk about Chesapeake being a takeout target but I can’t imagine Aubrey selling for less than $60 per share.  I wouldn’t like any deal under $70 as I think the long-term value is intact and their capital position is looking better each quarter.

Performance measurements:

  • Meet cash flow projections (lowered due to hurricane shut-ins and lower prices):
    • 2008 Q4: $1.250B - $1.375B  ($1.375B - $1.425B)
    • 2009: $5.4B - $5.7B ($5.8B - $6B)
    • 2010: $6.25B - $6.75B
    • FCF positive by 2010
  • CapEx (do not outspend cash resources in 2009/2010)
    • Q4 2008: $1.6B - $1.8B
    • 2009: $5.7B - $6.5B
    • 2010: $6.1B - $6.8B
  • Asset monetizations:
    • CLOSED ($150M) Misc OK assets: 2008 Q4
    • S. TX assets: Nov 2008
    • CLOSED ($1.25B + drill carry) Marcellus JV: Nov 2008
    • CMP partner: 2008 Q4 - 2009 Q1
    • VPP#4: 2008 Q4
    • Q4 2008: $2.5B - $3B
    • 2009/2010: $2.3B - $3.3B
  • YE 2008 cash on hand: ~$3.5B
  • 2008 production 851 - 861 bcfe
    • Barnett - 675 mmcfe/day by YE 2008
    • Fayetteville - 200 mmcfe/day by YE 2008
    • Haynesville - 75 mmcfe/day by YE 2008
  • Hit reserves guidance @ 12-12.5 tcfe by YE 2008 & 13-14 tcfe by 2009 (they have already met 2008 target)
  • Maintain 2:1 ratio on risked/unproved to proved reserves. Large decline may signal end of growth. This ratio is currently closer to 4:1.
  • Operating costs (per mcfe):
    • G&A: $0.43 - 0.49
    • DD&A: < $2 for 2009/2010 ($2.50 - $2.70)
    • DD&A (non-oil/gas): $0.20 - $0.24
    • interest expense: $0.50 - $0.55
More on this topic (What's this?)
Chesapeake Energy Will Not Stay this Cheap
Closed CHK Naked Puts for Profit
Read more on Chesapeake Energy at Wikinvest

2 Responses to “Chesapeake Energy (CHK) Shoring Up Balance Sheet”

  1. The Enlightened American » 115th Edition of the Festival of Stocks Says:

    [...] Chesapeake Energy (CHK) Shoring Up Balance Sheet [...]

  2. The Enlightened American » Oil Headed To $25? Time To Accumulate For The Long-Term Says:

    [...] of Chesapeake, like I said previously, CEO Aubrey McClendon has cracked the code on addressing market concerns about his company. After witnessing the market vomit his [...]

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