Still feeling the effects of too much natural gas and not enough demand, energy companies are looking for creative maneuvers for keeping their businesses profitable. Chesapeake Energy (CHK) is utilizing the technique of partaking in some good old fashioned deal negotiations to build up cash. The company had been on a selling spree late last year, shedding some pipeline and other infrastructure to raise about $2 billion, but it is Chesapeake's tenacity to continue making deals to raise cash that makes this company so attractive. I believe Chesapeake is going to soar in coming years based on its proactive approach to generating money, its future rewards from natural gas, and its constant hunt for new shale assets.
Trailing slightly behind Exxon Mobil (XOM), Chesapeake is the largest U.S. producer of natural gas. Of course, we all know that natural gas hasn't budged much in regards to demand and its recent price dipped below the dreaded $2 mark. Even rival ConocoPhillips (COP) has had to make adjustments through partnerships, spin-offs, and acquisitions. But this is where Chesapeake begins to shine. The company is raising cash, building up a source of funding for future expansion. In a statement made in early April, Chesapeake's CEO Aubrey K. McClendon, said, "We plan to monetize other non-strategic assets during 2012, including our assets in the East Texas Woodbine play where we own approximately 50,000 net acres of leasehold. We look forward to the completion of our Texoma Woodford transaction and other planned 2012 asset monetization transactions in the months ahead for proceeds of approximately $8-10 billion." The company is on track with its 25/25 plan, which intends to reduce its long-term debt through monetizing its assets and a reduction in lease-hold spending by 25%, while increasing its natural gas and oil production by the same percentage during 2012. The influx of cash will be used for more exploration and production primarily targeting Eagle Ford Shale, Utica Shale, Mississippi Lime, Granite Wash, Cleveland, Tonkawa, Niobrara, Bone Spring, Avalon, Wolfcamp and Wolfberry.
In the most recent of deals, Chesapeake hit a trifecta with deals totaling $2.6 billion. The company gained $1.25 billion from selling preferred shares of a new subsidiary, CHK Cleveland Tonkawa, which owns unconventional liquids-rich assets in Oklahoma. It also closed a sale of a 10-year volumetric production payment for proceeds of approximately $745 million, or $4.68 per thousand cubic feet of natural gas equivalent to an affiliate of Morgan Stanley. That deal also includes certain producing assets in its Anadarko Basin Granite Wash play and current net production of an estimated 125 million cubic feet of natural gas equivalent per day and approximately 160 billion cubic feet of natural gas equivalent of proved reserves. The last piece of the trio included the company signing a purchase and sale agreement to XTO Energy Inc., a subsidiary of Exxon Mobil Corp., for about $590 million in cash for about 58,400 net acres of leasehold in the Texoma Woodford play in Bryan, Carter, Johnston and Marshall Counties.
But the sell, sell, sell, makes up just one aspect of the makeup of Chesapeake. The company has continued to hunt for new shale assets as well, hoping to maintain its status as one of the nation's top producers of natural gas. Since 2008, Chesapeake has drilled at least 367 wells in regions that include the Permian Basin. At the beginning of 2012, McClendon stated that the company has stepped up plans to produce more oil and natural gas liquids while cutting dry-gas output and that some 60% of its revenue would come from oil and NGLs in 2012, up from roughly 50% anticipated by the company just a month earlier. The company plans to invest heavily for the development of its holdings in Eagle Ford Shale, Granite Wash and Mississippi Lime, forecasting it will deliver an average output of 250,000 barrels per day, up 70% from 2011 figures. The company wants to spend $7.5 billion for drilling for oil in hopes to be among the top five producers by 2015. Total 2012 production for Chesapeake is expected to be in the range of 1,318 1,382 Bcfe, particularly in Haynesville and Marcellus Shale plays. Liquids production forecast for 2012 is 53 MMBbls to 57 MMBbls, and the company expects its natural gas production in the bands of 1,000 1,400 Bcf for 2012.
Because of the increase in the cost of goods sold as a percent of sales from 49.22% to 57.02%, year on year, Chesapeake had little change in net income, from $1.77 billion to $1.74 billion, but revenue grew 24.23% from $9.37 billion to $11.64 billion. The company reported sharper-than-expected adjusted third-quarter 2011 earnings of $0.72 per share. Chesapeake's dividend is an unusual trend for an oil and gas company. Year on year, growth in dividends per share increased 12.50% while earnings per share excluding extraordinary items fell by 7.81%.
At the end of the fourth quarter, 2011, Chesapeake had a cash balance of $111 million and debt balance stood at $11,789 million, representing a debt-to-capitalization ratio of 41.9%, versus 39.4% in the preceding quarter. Operating cash flow increased 14.2% year over year to $1,409 million. During 2011, the company increased its cash reserves by 244.12%, or $249.00 million. It earned $5.90 billion from its operations for a cash flow margin of 50.73%, and the company generated $158.00 million cash from financing while $5.81 billion was spent on investing
Chesapeake's projections are based on $100 per barrel of oil and $4/mmBtu natural gas (a huge projection based on current prices), unhedged oil and gas revenue of $6.76 billion in 2012, and rising to $9.06 billion in 2013. Operating cash flow is expected to increase almost 60% over the same period assuming an increase of only $1 in natural gas prices. The company is probably the industry's most active player in managing its asset portfolio through a combination of acquisitions and disposals. With natural gas accounting for over 87% of its production, the company is sure to profit handsomely when prices come back around.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.