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Vera Yuan
Vera Yuan
Articles (1063) 

Bill Nygren Comments on Chesapeake Energy Corp

July 09, 2015 | About:

Chesapeake Energy (CHK) has been a notably poor performer in 2015, down 42% since the start of the calendar year, and deserves further discussion. Every oil and gas producer has been hurt by the decline in commodity prices, but it has been particularly painful for Chesapeake. This is because Chesapeake has an unusually large fixed-cost base, which magnifies the impact falling revenue has on earnings. The outsized costs stem from onerous transportation contracts that require Chesapeake to pay a fixed-dollar amount to suppliers regardless of the volume of energy the company produces. Since a portion of these agreements cover assets that are not economical at today’s prices, Chesapeake’s high-return assets must now shoulder the full burden of these legacy costs as well as their own costs. At current commodity prices Chesapeake is losing money, and investors have become worried about the company’s liquidity.

We believe these issues are manageable, and we remain confident in the company’s ability to improve its earnings and liquidity. We believe Chesapeake’s huge scale will allow the company to sell a relatively small percentage of its future production in exchange for cash making up a relatively large percentage of the company’s current enterprise value. Such divestitures may take various forms (providing immediate cash, third party drilling capital, or simply reducing transportation burdens), but all would help resolve liquidity issues while also highlighting what we believe is the large disconnect between Chesapeake’s intrinsic value and its market price. Considering that Chesapeake’s Board of Directors looks at such decisions with the goal of maximizing value per share, we are comfortable that our investment is in good hands.

From Bill Nygren (Trades, Portfolio)'s Oakmark Select Fund Second Quarter 2015 Commentary.

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