|New Threads Only:|
|New Threads & Replies:|
Forum List » Value Ideas and Strategies|
Share and discuss value investing ideas and investing strategies.
Chesapeake Energy - When Asset Sales and Board Shakeups Become the Only Option
Posted by: Muhammad Bazil (IP Logged)
Date: September 27, 2012 11:17AM
Chesapeake Energy’s (CHK) corridors of power have been characterized by a lot of activity over the past several months. Not only has Aubrey McClendon, the chief executive, been under endless scrutiny over the conflict between his personal finances and corporate obligations, but Chesapeake’s whole board has also undergone some major shakeups.
These shakeups underscore the rickety situation at Chesapeake, which has cast its stock in a teetering motion for a better part of the year. Nonetheless, some sense of hope seems to be restored at Chesapeake. This follows continued efforts to push forward with asset sales.
The asset sales were geared towards plugging the cash drain that has since been synonymous with the company.
The big question however remains: Now that Chesapeake seems to be facing the right direction, will it maintain its course or will it veer off track and head back to the hedges of disaster?
Before delving into the innumerable possibilities, it would be in order to objectively look at its previous activities.
Earlier in August, I was particularly worried about the cash crunch. This is because the 46 percent year-over-year dip in gas prices last quarter had greatly affected Chesapeake. After all, the energy bigwig attributes 90 percent of its production to natural gas. In fact, a section of analysts at the time believed that Chesapeake’s future was dependent on a tighter operating cash flow and more oilfield sales.
Fortunately, Chesapeake has cushioned itself from what could have otherwise been a huge failure by heightening the tempo in its asset sales.
By merely accenting its aggression, the energy heavyweight has already begun receiving positive remarks from analysts, a sign of restored hope.
Apart from the positive earnings earlier in the month, it recently received positive remarks from credit market investors who cited that the increased asset sales would be instrumental in plugging the $22 million cash shortfall.
What does this mean for Chesapeake’s future?
Before laying down the probable flow of events following Chesapeake’s improvements, it would be in order to take facts as they are.
While this renewed energy and aggression spells hope for the future, Chesapeake is still in the gutter. Its bond yield not only dipped to 6.28 percent as compared to April’s 6.76 percent, but Moody’s may also downgrade it if it does not exceed $7 billion in divestitures by the fall of 2012.
With this in mind, I believe that the grounds to make speculation are solid enough.
I believe that the long run will avail a lot of possibilities for Chesapeake and that if it stays in rail, investors can be assured of winning.
First of all, by the end of 2014, Chesapeake will have already plugged the cash drain and will probably have a lot of ready capital to pump into viable projects. In addition to that, board members alongside chief executive Aubrey McClendon have learnt their lesson the hard way and seem to have steered clear of trivial issues in favor of important corporate obligations. As such, I believe that Chesapeake has now streamlined its activities and directed them towards core obligations. This means that its goals of making a huge comeback are now more realizable.
Another issue that cannot be overlooked is competitors. While most of its competitors have stronger financial backings, Chesapeake still has the edge in terms of quarterly revenue growth. In my line of thought, this means a lot. It demonstrates its unrivaled growth.
While some of Chesapeake’s bigger competitors like ConocoPhillips (COP) and BP Plc (BP) have negative quarterly growth figures, it records a positive figure of 0.02.
The only thing that I believe will drag Chesapeake down at such a time is its costs. Considering its size with regard to market cap, it has too many employees and needs to adopt a tactful cost-cutting strategy. Anadarko Petroleum Corporation (APC), which has a market cap of $34.53 billion, has 4800 employees while Chesapeake with its lesser $12.21 billion market cap has 12,600 employees. ConocoPhillips also has a small workforce considering its large size. Labor is expensive and in most cases creates the incredibly big gap between revenue and income.
If Chesapeake continues placing effort on its asset sales while at the same time maintaining tranquility at top-level management, I am positive that it will be able to make a comeback and restore bullishness to its stock.
Stocks Discussed: CHK, APC, BP, COP,