I’m still here sitting on my hands. Looking at Chesapeake almost daily. Looking at the prices being paid for acreage in the regions where CHK is almost always the number 1 or number 2 acreage holder. Doing the math on these transactions and trying to determine what that means for the value of CHK’s assets. And always shaking my head about how the total is always at least 3 times the current stock price.
Am I being disciplined by not buying, or am I just being stupid ?
And today more evidence that what Chesapeake owns is worth much more than the stock market is giving them credit for. Today Chevron (NYSE:CVX) announced that it is buying Atlas Energy (ATLS) in a deal worth $4.3 billion.
Chevron explained the reason for the deal as follows:
“Atlas “has one of the premier acreage positions in the prolific Marcellus,” George L. Kirkland, Chevron vice chairman, said in a statement. “The high quality resource, competitive cost structure in the Marcellus, strong growth potential of the asset base and its proximity to premier natural gas markets make this targeted acquisition a compelling investment for Chevron.””
Atlas reported more than 1 trillion cubic feet of natural gas reserves at the end of last year and controls 622,000 acres in the Marcellus Shale, according to its website. The company reported today that daily output for the third quarter rose 18 percent from a year earlier to the equivalent of 118.3 million cubic feet.
And the metrics on the deal work out to about $9,000 an acre for the Marcellus holdings.
Which leaves me asking myself “How many times do I have to see profit motivated companies in this industry verify the value CHK’s acreage holdings before I believe it and take a significant position ?”
You will note above that Atlas just sold its acreage for $9,000 per acre.
Consider what CHK is currently holding:
Marcellus – 1,620,000 acres
Haynesville – 525,000 acres
Barnett – 215,000 acres
Fayetteville – 440,000 acres
Bossier – 200,000 acres
Anadarko Basin – 1,015,000 acres
Eagle Ford – 625,000 acres
Permian Basin – 680,000 acres
Powder River and the DJ – 800,000 acres
If you add them all up and apply prices from recent transactions that are publicly available you get to a share price of over $70 per share vs $23 today. The transactions are happening every month, and it is getting hard to dispute the values of these properties today. And if they can get these deals done at $4 natural gas prices, what would they be worth if natural gas every improved ?
The argument that I always hear is that these shale gas plays are not as economical as the companies producing from them make them out to be. That argument is getting very hard to swallow given the sheer number of intelligent companies are paying the currently prices for these assets. Chevron, Statoil, BP, Exxon, Total, Reliance, CNOOC and others are all looking at these properties and believe that they are making good investments.
Realistically, are all of these companies that incompetent that they are making deals that are not going to be profitable for them ? Seems far fetched doesn’t it ?
So what has held me out of Chesapeake ? Two things. One is that I prefer exposure to oil given that I believe $70 plus oil prices are here to stay. The second is the bad taste in my mouth from watching Chesapeake’s Board of Directors hand CEO Aubrey a $50 million cheque in order to basically get him back on his feet after he lost all of his CHK holdings through margin calls.
I am starting to get the feeling that I will be kicking myself for not loading up on CHK at these prices. I also can’t help but wonder why someone doesn’t attempt a hostile takeover of the company at these prices. There is no large shareholder standing in the way from what I can tell.
I encourage you to have a look at CHK’s investor presentation and then do some due diligence of your own to verify the prices being paid for the acres where CHK has huge land holdings. Here is the link.