This analysis of Chesapeake Granite Wash Trust (CHKR) was provided to TradingIPOs subscribers in advance of its IPO. On November 11 the company announced that its initial public offering of 20 million trust units was priced at $19 per unit.
Chesapeake Granite Wash Trust (CHKR) plans on offering 26.9 million units at a range of $19-$21. Morgan Stanley (MS) and Raymond James (RJF) are leading the deal; Deutche Bank (DB), Goldman Sachs (GS) and Wells Fargo (WFC) are co-managing. Post-IPO CHKR will have 46.7 million units outstanding for a market cap of $934 million on a pricing of $20.
IPO proceeds will go to parent company Chesapeake Energy (CHK). CHK will own all non-floated units, including subordinated units, 42% of CHKR post-IPO. CHK is the 2nd largest producer of natural gas and is the most active driller of new oil and natural gas in the US.
CHKR will make initial distribution of $0.54 to unitholders fairly quickly post-ipo at the end of December 2011.
Targeted distribution by year:
- 2012 - $3.13, 15.7%
- 2013 - $3.48, 17.4%
- 2014 - $3.41, 17.05%
- 2015 - $3.18, 15.9%
Distributions will drop off quickly after 2015. 2016 distributions should be $2.28 or 11.4%. Expect distributions to drop below $2 annually beginning in 2017. Even so the first full five years public, CHKR's target distributions will equal $15.48 or 77% of mid-range pricing of $20. Assuming everything else checks out, this deal is an easy recommend in range based on the strong parent and the hefty payout the first full years public.
First full five years public with targeted distributions
- PER: $13.90
- SDT: $14.97
- CHKR: $15.48
From the prospectus:
Chesapeake Granite Wash Trust is a Delaware statutory trust formed in June 2011 to own (a) royalty interests to be conveyed to the trust by Chesapeake in 69 existing horizontal wells in the Colony Granite Wash play located in Washita County in western Oklahoma (the "Producing Wells") and (b) royalty interests in 118 horizontal development wells.
These growth Trusts have gotten popular recently as a vehicle for aggressive E&P operations to raise money from mature fields to fund capex/pay down debt. As long as they continue to be structured for the unitholder as favorably as this one and SDT/PER, they should continue to work out well.
Colony Granite Wash Formation - 45,500 gross acres (28,700) held by CHK located in the Anadarko Basin in western Oklahoma. 44.3 mmboe, consisting of 18.6 mmboe in the developed wells and 25.7 mmboe in the development wells. 19% oil, 31% natural gas liquids and 50% natural gas located at 11,500-13,000 feet.
Note that unlike SDT/PER, natural gas will make up a higher percentage of production here than oil. Oil will make up 35%-40% of revenues.
CHK plans on drilling the 118 development wells in proved undeveloped locations by 6/30/15.
Royalty Interest - 90% of the net proceeds in the 69 existing horizontal wells and 50% of the net proceeds from the 118 planned development wells.
CHK owns a 47% net revenue interest in the producing properties and 53% net revenue interest in the development properties. As such the Trust will have a 42% net revenue interest in the producing properties and a 26% net revenue interest in the development wells.
Hedges - 37% of expected revenues to be hedged through 9/30/15. Oil is hedged at an average of $87.42 per barrel through 9/30/15. Note that natural gas production is unhedged.
Trust lifespan to be 20 years, although as we've noted, distributions will begin decreasing annually from 2015 with distributions under $2 annually beginning 2017.
CHK will operate 94% of all the wells. CHK began drilling horizontal wells in the Colony Granite Wash in 2007 and is currently the largest leaseholder in the area with 61,100 net acres. CHK has drilled 133 of the 173 horizontal wells in the formation since 2007. 9 rigs drilling for CHK in the formation.
Risk - There are two risks here as hedges here are not as strong on a percentage of production as either SDT or PER. A significant dip in the price of oil, natural gas and natural gas liquids would have a negative impact on CHKR's yield. The other very real risk here is CHK fails to effectively execute the drilling plan. If anything delays the drilling plan in a given quarter or two, expect CHKR to dip.
CHKR expects to receive approximately $36 million each quarter the first half of 2012.
Note that CHKR has been conservative in forecasting oil and natural gas prices through mid 2014 with natural gas topping around $5 and oil at $93.
Conclusion - Another good energy Trust structured in range to raise cash for CHK and provide strong returns for unitholders. CHK has a strong track record in this formation. As long as they execute the drilling plan, this one should be a winner. Easy recommend here, expect this to trade to $25-$30 sooner than later.