I’ve written about Chesapeake quite a few times over the past few months as the share price lingered in the $21 to $23 range. This link recaps most of what I’ve written.
Since news of Icahn’s large position came out mid December Chesapeake shares have had a nice run up to $26.70.
Over the years Chesapeake management and shareholders have had a nice little game of Charlie Brown and Lucy with the football going on.
I’m sure you remember what happened to poor old Charlie Brown over and over again. He was the placekicker and Lucy held the football for him. Every time Charlie Brown would go to kick the ball, Lucy would pull it out of the way and Charlie Brown would fall on his backside. Of course Lucy would always promise Charlie Brown that she wouldn’t do it again, and Charlier Brown would fall for it.
Since 2006 I’ve lost track of how many times Chesapeake management has told shareholders that the land grab is over and that they were now committed to a small amount of land leasing and instead focused on reducing debt. They have yet to do it.
And quite frankly I tend to think that they have created lot of shareholder value by spending cash on locking up acreage instead of on debt reduction. Their recent foray into the Eagle Ford is an excellent example. Chesapeake went in and acquired a large acreage position in late 2009. Sold 33% of it to CNOOC this year recovering all of Chesapeake’s cost of acquisition. Therefore Chesapeake has provided a shareholders with the remaining 67% of that leasehold position to shareholders at no cost. Value creation in the billions.
The stock market however doesn’t care about that sort of thing when it comes to Chesapeake. The stock market seems to want to see a commitment to cleaning up the balance sheet.
So cue Icahn and now cue another promise by Lucy not to move the football when investors come to kick it…..I mean another promise by Chesapeake to stop spending on land acquisitions and instead direct cash flow to debt reduction. Today Chesapeake introduces its 25/25 plan:
“Growth Rate to 25% from its Previously Planned Growth Rate of 30-40% Through Asset Monetizations
Having built what the company believes is the industry's largest U.S. natural gas and oil resource base, Chesapeake is now focusing on executing its updated 2011-12 strategic and financial plan, "the 25/25 Plan," while continuing to transition its production mix towards more liquids. This 25/25 Plan features reducing the company's long-term debt by 25% over the next two years by substantially reducing leasehold spending and through various asset monetizations, which will reduce the company's planned two-year production growth rate to 25% from its previously planned 30-40% growth rate. Furthermore, Chesapeake does not intend to issue any common or preferred stock to achieve its debt reduction objective.
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented, "We are excited to announce our updated 2011-12 strategic and financial plan that features our plan of 25% long-term debt reduction while also delivering what we believe will be best-in-class 25% production growth. This plan represents a fundamental shift from our aggressive asset accumulation of the past few years to a multi-year period of asset harvest, characterized by a clear focus on capital discipline and maximizing returns. We believe we have assembled the best assets in the U.S. and have the technology, experience and financial and human capital to convert these assets into rapidly growing production, proved reserves and cash flow. Successful execution of our 25/25 Plan should very substantially reward our shareholders in both the short and longer term."
I have no idea if Aubrey and the boys are serious this time. I still don’t have a meaningful position here after circling CHK for months in the low $20s. As I’ve said several times before, I think my thumb sucking is likely going to make this a “mistake of omission”.