Chesapeake Energy: Still A Buyout Candidate? Update

May. 6.13 | About: Chesapeake Energy (CHK)

Chesapeake Energy (NYSE:CHK) is the country's second largest producer of Natural Gas and is quickly becoming one of the country's largest oil producers. The company has had its problems of late. Aubrey McClendon, the founder and CEO has been forced out after getting the company into a liquidity crunch after buying more leasehold than the company could afford to exploit. An historic plunge in natural gas prices accelerated the difficulties.

I wrote an article on January 28 of this year, having to do with speculation that the company would be bought in total at a significant premium to the then current price.A little over 90 days has passed since writing that article. Let's see what has happened in the meantime.

Before I continue, let me repeat the two things that would have to happen to change my speculative buyout thesis:

1. Hire or promote a permanent CEO to replace Mr. McClendon.

2. Continued asset sales at a sufficient rate to indicate that the company intended to continue as an independent energy producer. That would probably necessitate the selling of at one of the "core of the core" assets for a few billion dollars.

During the past 93 days the company has:

  • February 25, 2013: Entered into a joint venture agreement with Sinopec of China for a half interest in 850,000 acres of leasehold in the Mississippi Lime play for $1.03 billion cash. The cash is to be paid upon closing sometime in the second quarter. I don't consider this to meet the requirements of a large Core of the Core sale since there has been some speculation that the ML play in this area is less than wonderful and this JV is the first to NOT include a drilling carry which would assist in future development of the asset.
  • March 19: The company Sold $2.3 billion in notes. The proceeds from that sale were earmarked for debt reduction elsewhere. We can't tell whether that has happened, but if it did it would have no effect on outstanding debt.
  • March, 29, 2013: The company announces the establishment of the Office of the Chairman, since the BOD has "failed" for 93 days to find a replacement for Mr. McClendon to fill the position of CEO. The members of the OoC will be Archie W. Dunham (non-Executive Chairman of the BOD), Steve Dixon as the Acting CEO while continuing in his role of COO, and Dominic J. Dell Osso Jr. (NASDAQ:CFO). On Jan 29, 2013, the same date of the retirement agreement of Mr. McClendon, Mr. Dixon and Mr. dell Osso were awarded CHK stock options as a retainment bonus in the amount of 360,000 and 300,000 shares, respectively.
  • April 2, 2013: Sold 158,000 acres and 176 wells to Gastar (NYSEMKT:GST) for $75.2 million. This deal also included ending litigation and selling Gastar shares held by CHK Back to Gastar.
  • April 16: Sold 57, 275 acres and 11 producing wells in the Woodbine/Eagleford play to Energy Exploration Partners. No information on price and no announcement from CHK.
  • April 29, 2013: Sold 162,000 acres in the Marcellus play to Southwestern Energy (NYSE:SWN) for $93 million. No announcement from CHK.
  • May 1, 2013: Sold Mississippi Lime midstream assets to Sem Group for $300 million. Confirmation of lack of interest in the ML.
  • May 3, 2013: CHK Sells 99,000 acres of Marcellus play to EQT for $113 million.

In summary:

Aubrey is gone. No new CEO has been found in 93 days. The BOD obviously doesn't have enough confidence in Steve Dixon to name him CEO. I'm no expert on M&A, but if I were in discussions to acquire CHK in total, I would want Aubrey and his baggage gone. I would want the COO and CFO handcuffed to the company long enough to help with the digestion of the acquisition.

The leasehold sales in the Marcellus are minor and probably involve leases that were near expiration. Who knows what the sale of the Woodbine/Eagleford acreage is all about, CHK isn't talking. The ML midstream asset sale is to be expected. The Joint Venture with Sinopec appear to be the price of learning to deal with shale gas plays back in China.

Again, if I was serious about acquiring CHK, I would have no problem with-- and actually encourage-- the above asset transactions. CHK is in deep enough yogurt that I would expect a sale of one or more of the core plays for multi-billions of dollars in order to get the liquidity problem in the rear view mirror, unless, of course, I were talking to a deep pocket buyer.

Instead the company has sold $1.6 billion of the $7 billion it needs to sell and $1 billion of that is not closed yet. No mega-deals, no permanent CEO, retained critical management; my speculation for a buyout remains intact.

It seems good enough to me for a way out-of-the-money call option play. If it doesn't happen by Jan 2014, I'll throw in the towel. This is a low probability, high risk, high return play, so be careful if you do it. Buying CHK shares reduces the risk.

Disclosure: I am long CHK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.