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It Is Time For A Hostile Run at Chesapeake Energy - Where is T Boone When You Need Him ?

Canadian Value

CanadianValue

210 followers
I’ve read both of Boone Pickens biographical books. I liked the first one better as it detailed his efforts through Mesa Petroleum to takeover much larger oil companies Unocal, Phillips Petroleum and Gulf Oil. To be honest I’m not terribly enamored with Pickens as an investor as I think his aggressive approach could just as easily left him bankrupt as it made him rich. But I certainly do have a soft spot for his efforts to take advantage of assets undervalued by the stock market and poorly exploited by entrenched management.


Thinking of Pickens and hostile takeovers led me to thinking about Chesapeake Energy.


Clearly the assets that Chesapeake holds are in high demand. They have so far sold pieces of five different resource plays to five different companies. They also have indicated that they have two more joint ventures coming in 2011. One for the Niobrara Shale and the second for a yet to be named play. Here are the transactions so far:


Haynesville JV with PXP – Sold 20% of the acreage for $3.16 billion or $30,000 per undeveloped acre (note that this one was completed at the top of the natural gas market in early 2008)


Fayetteville JV with BP – Sold 25% of the acreage for $1.9 billion or $12,300 per undeveloped acre


Marcellus JV with STO – Sold 32.5% of the acreage for $3.37 billion or $5,700 per undeveloped acre (note that this transaction was completed in Nov 2008 when it was virtually impossible to complete a deal)


Barnett JV with TOT – Sold 25% of the acreage for $2.25 billion or $15,700 per undeveloped acre


Eagle Ford JV with CEO – Sold 33.3% of the acreage for $2.16 billion or $10,800 per undeveloped acre


And it isn’t just Chesapeake selling pieces of these plays to the big boys. XTO sold the entire company to Exxon, Shell paid almost $5 billion for East Resources, India’s Reliance Industries bought into Pioneer’s Eagle Ford play…..etc, etc, etc.


My point is that there is big demand for the assets that Chesapeake has assembled and the prices being paid are pretty attractive to the companies like Chesapeake that are selling.


However, while Chesapeake and others can sell of pieces of these properties at very nice prices the stock market values these assets much differently. I’ve looked at what the implied value per share of Chesapeake is using its asset sales to indicate what each of its properties is worth. It breaks down as follows:


1) Marcellus (sold 33% for $3.37bil) – Implied value of that retained is $6.75bil


2) Haynesville/Bossier (sold 20% for $3.16bil) – Implied value of that retained is $12.64bil


3) Barnett (sold 25% for $2.25bil) – Implied value of that retained is $6.75bil


4) Fayetteville (sold 25% for $1.9bil) – Implied value of that retained is $5.7bil


5) Eagle Ford (sold 33% for $2.16bil) – Implied value of that retained $4.32bil


Total value of retained interest in shale plays is $36 billion


To that value we also need to add Chesapeake’s other assets:




6) Conventional assets - $8bil (PV10 value)

7) Midstream/Drilling Rigs - $6bil

8) Drilling carries - $4bil

9) 12 early stage oil plays - $5bil

The value of the retained interest in the share plays plus these other assets equals $59bil

Less debt $12bil

Net assets $47bil

Total shares 758mil

Value per share $62

Share price $22


I don’t for a second think that I’ve got value of the assets calculated exactly correctly at $62 per share. But I do think that it is very obvious based on the values being paid by profit motivated buyers that there is a huge difference between the price that Chesapeake is entering JV transactions at and what the stock market is valuing the sum of the parts at.


I also think that I have greatly understated the value of the acreage in liquids rich plays that Chesapeake has put together over the past 3 years. According to their most recent presentation they have 3 million acres in such plays, they just a piece of the Eagle Ford for $10,800 per developed acre, so it is quite likely that the $4 billion I have pegged in for valuing these is very low.


Now let’s take the next step here.


First, we have virtually every large E&P company scrambling to invest dollars in these shale plays that the independents have locked down. These assets are clearly something the large E&Ps want and we can see the prices they are willing to pay.


Second, we have a company in Chesapeake that retains large acreage positions in virtually every hot play other than the Bakken that the large E&Ps are interested in. However, the share price of Chesapeake values these shale assets at a fraction of what the large companies are willing to pay.


Put the two together and what do you have in Chesapeake ? A collection of all of the assets that everyone wants at a price much lower than what everyone is willing to pay.


A major oil company could pay a pretty hefty premium to the current share price of Chesapeake and still get these assets at a sizable discount to what virtually every company in the industry is willing to pay for them in arm’s length transactions.


Somebody should step up and take this company out. Maybe good old T Boone has one more exciting play left in him.




About the author:

CanadianValue
http://valueinvestorcanada.blogspot.com/

Rating: 3.9/5 (34 votes)

Comments

grandpagates
Grandpagates - 3 years ago
biascoechea
Biascoechea - 3 years ago
Very prescient indeed Canadian Value, I hope you bought some. My worry is that natural gas keeps slugging along this bottom due to oversupply. Demand for natural gas does not build overnight. There are many utilities and pipelines being built but these take many years to come online. Maybe longer than CHK can remain a competitive and viable option. I've always thought the integrated oil companies have the capability of pouncing on the natural gas industry at the first sign of a revival in prices. Any thoughts?
paul mcdonald
Paul mcdonald - 3 years ago
The USA would be wise to adopt natural gas as an alternative to gasoline purely to get away from our dependence on foreign fuel. The USA has an abundant 100 year plus supply. Should foreign supply of oil suddenly halt or diminish it will hurt the cost of goods due to higher transportation costs. This can be avoided with the technology available now. Why risk such a catastrophe?

Twenty Five years ago an appliance repair man pulled into my parking lot with a large tank on the back of his pick up service truck. I asked him what it was. He told me he had the tank filled up with natural gas at his shop and he was able to drive all week at 1/5 the cast of gasoline, with no difference in performance, He then opened the hood to show me his motor. It was the same motor used in similar gasoline trucks at the time, but it had some additional black supply lines to connect the engine to his natural gas tank in the rear of his truck. That man was thirty years ahead of us in alternative fuel savings. Today I am even more impressed. Our Government could start by shifting Government Automobiles to natural gas. Big cities could follow with a initial supply source & then grow as the market change over grew. Canada & Europe uses natural gas on large busses today successfully! Let's go America!

PM/ Memphis

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