It had to happen eventually. But it took a long, long time. From early October 2008 to the middle of December 2010 the share price of CHK didn’t venture far above $23. I understand that natural gas prices were pretty weak during this time period, but looking back on it I’m still surprised at how unimpressed the stock market was with a series of CHK transactions. A series of transactions all of which pointed to the value of CHK’s assets being multiples of the share price.
Here are the transactions that I’m talking about (Consider that during this time CHK’s enterprise value was under $30 billion):
September 2, 2008 – Announce sale of 25% of just their Fayetteville shale acreage to BP for $2 billion. That would imply an $8 billion valuation for the entire Fayetteville acreage owned by CHK.
November 11, 2008 – Announce a sale of 33% of just their Marcellus acreage to Statoil for $3.375 billion. That sale price implies that the entire Marcellus acreage that CHK owned prior to the sales was worth over $10 billion.
January 4, 2010 – Announce sale of 25% of CHK’s Barnett shale holdings to Total for $2.25 billion. This sale price would imply that the entire Barnett shale acreage is worth $9 billion. Three transactions almost $27 billion of value that is readily apparent (retained acreage and cash received).
October 10, 2010 – Announces sale of 33% of Eagle Ford shale holdings to CNOOC for $2 billion. This sale price would imply a $6 billion value for the entire Eagle Ford acreage. That is 4 transactions showing $33 billion of easy to see value in CHK assets and this excludes all of their booked proven and probable reserves on conventional assets.
And that wasn’t all. Despite selling all of these properties CHK grew production at over 10% per year and reserves at an even faster clip.
Eventually though, something had to give. And the tipping point was a large position in CHK taken by activist investor Carl Icahn in December which seemed to make the stock market think that something positive might happen. And the catalysts have kept rolling since Icahn’s interest, and these catalysts have moved the stock price:
January 16, 2011 – Chesapeake releases a 25/25 plan in which they detail how they expect to both reduce debt by 25% and grow production by 25% over 2011 and 2012. The market likes that.
January 24, 2011 – Lou Simpson of Berkshire Hathaway fame joins to Board of Directors and lessens the stock market’s lack of trust in a Board that was a little too close to the CEO.
January 30, 2011 – Chesapeake announces a sale of a 33% interest in their Niobrara acreage to CNOOC for $1.3billion, another implied value of almost $4 billion.
February 7, 2011 – Chesapeake announces the intention to sell its remaining interest in the Fayetteville shale and some other smaller assets for $5 billion to reduce debt. This transaction is subsequently completed to BHP on February 21.
It took a long time, but finally the market started paying attention. CHK shares at $23 in December are now over $34.
And while the assets CHK sold are very impressive, what is even more impressive is what they retained. Here is CHK commenting on the value of their retained asset base in their recent conference call:
“Now I'd like to turn to our Fayetteville asset sale to BHP and review its four most important implications for our company. First and most obviously, it is the key to achieving the 25% debt reduction portion of our 25/25 Plan which we believe will unlock the enormous asset value that we have built up inside our company. Second, I would like to point out what this sales price tells you about the value of our remaining assets. Please note that we are selling just 10% of the PV-10 of our proved reserves as of year-end 2010, implying that our remaining proved reserves are worth at least $40 billion. That means that all of our unproved resources, that's 175 Tcf of natural gas and 15 billion barrels of liquids, are valued at absolutely zero at today's Chesapeake market valuation.
And what could these 175 Tcf and 15 billion barrels of unproved resources be worth? We think we have established these various joint ventures into the value paid for our Fayetteville assets that our unproved assets are worth at least what our proved assets are worth or around $40 billion. In addition, we also have $6 billion of non-E&P assets such as our midstream assets and our interest in Chesapeake Midstream partners CHKM in our service company assets, plus $4 billion of drilling carries that are also not reflected in our current market value.
Added all up, and I think you can easily confirm asset values of more than $80 billion for CHK.”
I added it up folks, and $80 billion is something close to $90 per share. That would suggest that at $34 per share the company is still very attractive.
One thing for sure though is that there will be a serious slow down in positive news flow. There just has to be. There is however one more big piece of news coming in the first half of 2011. Chesapeake has assembled over 1 million acres in an unnamed unconventional oil play. We are going to learn more about that this year and it could be interesting for the stock price. Even for Chesapeake 1 million acres is a big amount of land.
I don’t currently own any CHK shares. I’m going to watch it over the next 6 months and hope that the stock market gets bored and allows the share price to drift back down so I can build up a position I should have established a year ago.
Here are the transactions that I’m talking about (Consider that during this time CHK’s enterprise value was under $30 billion):
September 2, 2008 – Announce sale of 25% of just their Fayetteville shale acreage to BP for $2 billion. That would imply an $8 billion valuation for the entire Fayetteville acreage owned by CHK.
November 11, 2008 – Announce a sale of 33% of just their Marcellus acreage to Statoil for $3.375 billion. That sale price implies that the entire Marcellus acreage that CHK owned prior to the sales was worth over $10 billion.
January 4, 2010 – Announce sale of 25% of CHK’s Barnett shale holdings to Total for $2.25 billion. This sale price would imply that the entire Barnett shale acreage is worth $9 billion. Three transactions almost $27 billion of value that is readily apparent (retained acreage and cash received).
October 10, 2010 – Announces sale of 33% of Eagle Ford shale holdings to CNOOC for $2 billion. This sale price would imply a $6 billion value for the entire Eagle Ford acreage. That is 4 transactions showing $33 billion of easy to see value in CHK assets and this excludes all of their booked proven and probable reserves on conventional assets.
And that wasn’t all. Despite selling all of these properties CHK grew production at over 10% per year and reserves at an even faster clip.
Eventually though, something had to give. And the tipping point was a large position in CHK taken by activist investor Carl Icahn in December which seemed to make the stock market think that something positive might happen. And the catalysts have kept rolling since Icahn’s interest, and these catalysts have moved the stock price:
January 16, 2011 – Chesapeake releases a 25/25 plan in which they detail how they expect to both reduce debt by 25% and grow production by 25% over 2011 and 2012. The market likes that.
January 24, 2011 – Lou Simpson of Berkshire Hathaway fame joins to Board of Directors and lessens the stock market’s lack of trust in a Board that was a little too close to the CEO.
January 30, 2011 – Chesapeake announces a sale of a 33% interest in their Niobrara acreage to CNOOC for $1.3billion, another implied value of almost $4 billion.
February 7, 2011 – Chesapeake announces the intention to sell its remaining interest in the Fayetteville shale and some other smaller assets for $5 billion to reduce debt. This transaction is subsequently completed to BHP on February 21.
It took a long time, but finally the market started paying attention. CHK shares at $23 in December are now over $34.
And while the assets CHK sold are very impressive, what is even more impressive is what they retained. Here is CHK commenting on the value of their retained asset base in their recent conference call:
“Now I'd like to turn to our Fayetteville asset sale to BHP and review its four most important implications for our company. First and most obviously, it is the key to achieving the 25% debt reduction portion of our 25/25 Plan which we believe will unlock the enormous asset value that we have built up inside our company. Second, I would like to point out what this sales price tells you about the value of our remaining assets. Please note that we are selling just 10% of the PV-10 of our proved reserves as of year-end 2010, implying that our remaining proved reserves are worth at least $40 billion. That means that all of our unproved resources, that's 175 Tcf of natural gas and 15 billion barrels of liquids, are valued at absolutely zero at today's Chesapeake market valuation.
And what could these 175 Tcf and 15 billion barrels of unproved resources be worth? We think we have established these various joint ventures into the value paid for our Fayetteville assets that our unproved assets are worth at least what our proved assets are worth or around $40 billion. In addition, we also have $6 billion of non-E&P assets such as our midstream assets and our interest in Chesapeake Midstream partners CHKM in our service company assets, plus $4 billion of drilling carries that are also not reflected in our current market value.
Added all up, and I think you can easily confirm asset values of more than $80 billion for CHK.”
I added it up folks, and $80 billion is something close to $90 per share. That would suggest that at $34 per share the company is still very attractive.
One thing for sure though is that there will be a serious slow down in positive news flow. There just has to be. There is however one more big piece of news coming in the first half of 2011. Chesapeake has assembled over 1 million acres in an unnamed unconventional oil play. We are going to learn more about that this year and it could be interesting for the stock price. Even for Chesapeake 1 million acres is a big amount of land.
I don’t currently own any CHK shares. I’m going to watch it over the next 6 months and hope that the stock market gets bored and allows the share price to drift back down so I can build up a position I should have established a year ago.
