I don’t think I’ve ever been so undecided about a company as I am with Chesapeake Energy (CHK, Financial). My analysis tells me that it is likely a very undervalued opportunity. My memory tells me to stay away.
Yesterday I listened to the Chesapeake investor day presentations. And as usual I came away impressed with the enormous amount of acreage that the company holds.
As I wrote earlier, it is also impossible to ignore the values that they are establishing for this acreage as they sell of 25% to 33% interests in various properties.
http://www.gurufocus.com/news.php?id=109134
All of these transactions give us an arm’s length, profit motivated buyer price for these properties. And when you add them all together, you get to a share price that is not 20% higher than where CHK is today, but rather multiples of where it is today.
The CHK CEO has laid it out for us in the previous conference call and it is hard to argue with as virtually all of it is verifiable through transactions:
1) Marcellus - $15 bil
2) Haynesville/Bossier - $15bil
3) Barnett - $7bil
4) Fayetteville - $5bil
5) Eagleford - $4bil
6) Conventional assets - $8bil
7) Midstream/Drilling Rigs - $6bil
8) Drilling carries - $3bil
9) 12 early stage oil plays - $5bil
Total assets $68bil
Less debt $12bil
Net assets $56bil
Total shares 758mil
Value per share $73.88
Share price $22
Bloomberg also provided the following recap of what was said at this week’s investor day:
“ Saying Chesapeake Energy will continue to lease land cheaply in obscure
shale oil plays and sell minority stakes to joint-venture partners, CEO
Aubrey McClendon told investment analysts Wednesday that his company will
become one of the five biggest oil producers in the US very soon.
"My guess is that no one in this room believes we will become a top five
oil producer," McClendon quipped, noting that 20 years ago no one would
have predicted that the Oklahoma City-based firm would be among the
nation's top natural gas producers.
McClendon told a lunchtime audience of analysts at the company's
headquarters that Chesapeake has already leased 10 billion to 15 billion
barrels of potential reserves in shale oil plays and will use the same
leasing and financing techniques it used to unlock huge volumes of
natural gas in shale formations.
"We're going to take what we learned in gas to unconventional oil,"
McClendon said, But unlike gas, where "we clearly proved we could overrun
the market, we can't affect the price of oil."
He told analysts to expect a new joint venture early next year involving
Chesapeake's Niobrara shale oil position in Wyoming and Colorado, with a
second partnership by the middle of the year in a shale oil play the
company won't identify.
McClendon said Chesapeake holds 1 million acres of shale oil leasehold in
that and other "mystery" plays, as well as more than five identified
shale oil plays stretching from South Texas' Eagle Ford north through the
Permian and Anadarko basins into the Rocky Mountains.
While Chesapeake has launched a plan to have 25% of its production
volumes in the form of oil and liquids by 2015, the company hasn't
forgotten gas. Saying its breakeven price for drilling in the Marcellus
Shale is $2.45/Mcf, Chesapeake GeoScience Manager John Sharp said the
Marcellus is poised for explosive growth this year and next.
Chesapeake is also pushing projects aimed at creating new markets for the
gas that's swamping the North American market, Senior Vice President for
Natural Gas Projects Mike Stice told analysts.
The closest to fruition, Stice said, is the effort to get developers to
build liquefaction capabilities into their idling liquefied natural gas
terminals along the Texas Gulf Coast. "Every operator on the Gulf Coast
has a liquefaction plan," he said. "In the near term, if you get the
right political wave, you can do it really quickly."
Stice said Chesapeake is leery of making direct investments in
construction of the first liquefaction terminals in the continental US,
but it is willing to support those efforts by signing long-term gas
supply contracts, probably tied at first to Henry Hub index prices and
then ultimately to LNG pricing within the Atlantic Basin.
Stice said Chesapeake was "in very serious discussions" with regulators
and has signed a memorandum of understanding with terminal developer and
operator Cheniere Energy of Houston.
A second effort is centered around gas-to-liquids technology, Stice said.
While he thinks it will take a technological breakthrough on the same
scale as what shale gas has done for US gas, plus another five years, to
get GTL operations up and running, eventually "GTL will be a reality in
the US."
So why do I resist making this a core investment holding ? Aubrey and his 2008 margin call. I’m sure you are familiar with it. The CEO borrowed in huge amounts to buy company stock in the years leading up to the meltdown of the stock market meltdown in 2008. He lost virtually all of his holdings.
I promised myself after seeing that I would not invest in a company where the head man manages the risk in his own personal portfolio so recklessly.
But yet, here I am. Still following the company. Still conflicted.
I think CHK is clearly undervalued. I also believe that there are two ways that an investor could win really big by investing in the company at these prices.
1) Natural gas prices move up – CHK is THE natural gas company of this century. If prices go up to $6 plus again this investment is a homerun.
2) Aubrey’s talk of moving quickly to oil pans out. They were victims of their own success in locking up natural gas shale properties (they flooded the market with product). That won’t happen with oil.
I’m starting to feel that you could win big if either of the above happen. But also that even if they don’t the CHK share price likely isn’t to go down much from here as their production keeps growing 15% year after year after year which will effectively deleverage the company.
When you start feeling that there is upside of multiples and little downside it might be time to really consider an investment.
