Meditations on CHK's future

For a moment let's step back from the regional aspects of this play and instead have a little macro discussion.  As many of you have doubtless seen over the past week CHK's founder and CEO Aubrey McClendon did a naughty, naughty thing.  He secured personal loans of ~$1.1 billion to invest in his company's wells.  As collateral he used...his investment in his company's wells.  Now this was obviously in poor taste since it aligned his interests with his own pocket book and not necessarily with his company.  He also levered his share of wells (which he bought with borrowed money) into deals that he was negotiating on behalf of his company.  This is corporate irresponsibility mixed with personal greed and that rarely delivers profitable results for the company's shareholders, most of whom are NOT billionaires like Mr. McClendon.

Stock price in the tank.  Sell or Don't Buy ratings from major analysts. Huge debt.  Massive reliance on natural gas, the price of which hit a ten year low last week.  Is it me or does CHK sound like the perfect candidate for takeover from a larger, more diversified company?

Many of you have leased with CHK, only to see them flip a share of that to a foreign company hungry to get into America's still-questionable shale boom.  Are any of you CHK lessors concerned that the company you signed with won't be around in five years?  Or does it not matter?  If you got the lease you wanted and a fair price I suppose the operator is of little matter to you.  As an outsider looking in (or rather an insider trying to look out) I'm curious as to what the general mood is.  Too often these discussions focus on the day to day, local workings of this industry and we forget about the world at large around us.  I'd love to hear feedback, if only to broaden the discussion and tone of this terrific website.

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Replies to This Discussion

Permalink Reply by mbc on April 25, 2012 at 5:01pm

As in itty-bitty land owner, in the scheme of things, if I were leased to CHK I don't think I'd give it much thought, particularly if I had signing bonus in hand. 

Whether the lease is transferred to another company or the lease comes back to me, I don't see it as a problem.  My lease gets honored by another driller, or, I'm free to lease it again...or not. 

Permalink Reply by Kathleen on April 25, 2012 at 6:27pm
Ive looked at it a few ways first this co. Is actively drilling and planning a lot of wells in our area so I want this co. to stay around and stay this aggressive. Now if they got bought there is nothing I could do about it and would have to wait and see if the new owner really had the resources to drill like this.
When it comes to the CEO I'm starting to lean towards he's making a bet that these wells will do well and do well soon. Even if I wasn't leased with them or this was done by another co. It would make me wonder what does this CEO know that I don't to make this kind of deal. I guess in time we will see if he's very reckless or just had faith.
Permalink Reply by Marcus Grayson on April 25, 2012 at 10:57pm

His "faith" in the success of wells is not rooted in real economics.  There is an inherent conflict because he needs these wells to be drilled, even if they don't really make much money.  That's in his best interests but not in the shareholder's best interests.  Despite the hype in other plays their real impact to the company has amounted to little more than over-promising and under-delivering.  Even if nat gas shot up to $5mcf they still wouldn't make any money on new wells in the Barrnet.  Now CHK is out of hedge position, so they'll essentially at the mercy of a brutal market.  The one thing that could save them is a liquids play.  But to get money to de-risk such a play (like the Utica/PP) they need to sell assets.  The only assets that anyone wants are liquids-rich.  So in order to develop the Utica/PP they need to sell part of it to pay their credit card off.  That's a rough position to be in.  

As far as him knowing more than everyone else that sort of hubris brought down Enron.  CHK's book value is hyper-infalted because the SEC allows them to extrapolate value from gas fields decades longer than they'll ever produce.  They have Barrnet wells projected to last 30 years.  The average is 7.5!  The mode is 4!  Think about that.  Four years of production when you told us they'd last 30.  

This article in Fortune articulates the issue better than I can: http://finance.fortune.cnn.com/2012/04/25/chesapeake-energy-collapse/

Permalink Reply by JR on April 26, 2012 at 2:42pm
Did you see they're doing away with this program? Announced today.
Permalink Reply by Marcus Grayson on April 26, 2012 at 9:59pm
Responding to public pressure, no doubt. Shareholders want the whole board and Aubrey gone. If gas prices stay low for much longer (and there's no math that says they won't) CHK could fall apart. They may come out on the other side but it's just as likely that they're the next Enron. Imagine them having to put all of their lease positions up at a fire sale. It'd be pandemonium.
Permalink Reply by Black Gold Junkie on April 28, 2012 at 9:46am
Marcus, pandemonium for whom? The shareholders? They knew the risk when pushing the buy button on their computer...the perferred shareholders and bondholders will be fine...leaseholders will still have their lease in hand. The only pandemonium will arise from all the other oil and gas companies salivating at the mouth from the possibility of purchasing Chesapeake for $.10 on the dollar, or from private equity firms wanting to do a leverage buyout. All in all somebody will extract the natural resources that us landowners have been blessed with...regardless of the fate of Chesapeake.
Permalink Reply by Dan on April 28, 2012 at 10:21am

Enron didn't go away.  New name and the employees and stock holders got screwed then EOG's stock tripled and record profits since.  It's amazing how well a company can do when they are able to shed all their financial responcibilities and pop "out on the other side"    

Permalink Reply by Black Gold Junkie on April 28, 2012 at 10:50am
What new name are you referring too... Enron is now known as the Enron Creditors Recovery Corporation, as the Enron Corporation is now a “defunct/asset-less shell” The name change became effective as of March 1, 2007. If Chesapeake goes under it want be because Aubrey McClendon was trying to fleece the flock like Enron...Enron was plain EVIL. Ulike in Europe, where there is no bankruptcy reorganization, it happens in this country every single day in corporate America...it just doesn't get the publicly that Chesapeake does because of their high profile. And as far as the shareholders go if they wanted a risk-free asset they should have invested in treasury bills or bonds...there is no gaurantee in life and especially in the stock market.
Permalink Reply by Dan on April 28, 2012 at 11:41am

EOG (Enron Oil & Gas) Resources spun off as Enron was sinking.  This has been the American business way for some time now.  Pretty popular practice even today.  We even have some current political canidates dotted across the land that have/had careers at helping companies like Enron back on their feet or not depending on the bottom line.

http://money.cnn.com/magazines/fortune/fortune_archive/2006/06/12/8...

Permalink Reply by Marcus Grayson on April 29, 2012 at 9:56pm

For a good example of what it looks like to run your business into the ground, file bankruptcy and emerge inexplicably stronger take a look at GM.

Permalink Reply by Black Gold Junkie on April 29, 2012 at 10:06pm
Or better yet...look at the airlines...I think its part of their business model.
Permalink Reply by Dan on April 29, 2012 at 11:49pm

"As GM goes, the country goes"  Popular saying untill GM started failing.  Maybe truer than we know?  Don't forget Chrysler twice and Harley once.  Bailouts aren't new but they still smell foul.

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