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.
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.
