I'm a disgruntled Chesapeake shareholder. But while I'm disgruntled, I will remain a shareholder and actually think adding Chesapeake Energy (CHK) at current stock prices is a pretty attractive proposition.
Like most Chesapeake shareholders I'm disgruntled about having a Board of Directors representing me that seems uninterested in actually representing me.
And I think it is pretty clear that this Board is not interested in representing me. Because if this Board was representing me, it would not have allowed the CEO of the company to be part of a hedge fund trading in the very commodity that Chesapeake produces. If it was representing me this Board would not have approved a $12 million antique map purchase from the CEO. If this Board was representing me it would be not have allowed the CEO to borrow hundreds of millions of dollars from a company that is also financing Chesapeake.
You are probably wondering why, if I am so disgruntled do I think adding shares of Chesapeake is an attractive proposition?
It is because I think the stock market is misunderstanding the issues facing Chesapeake as of today. This misunderstanding has pushed the stock price way too low in relation to the value of the assets that the company owns.
The media attack on Chesapeake's Board of Directors and management activity in my opinion is fully justified. The list of questionable items surrounding CEO McClendon is positively ridiculous.
But how did we jump from a CEO being involved in financial activities that are close to being conflicts of interest to Chesapeake being a company that is the next Enron? The way Chesapeake is being portrayed in the media would make a person think that the company has one foot in the grave.
And that is simply not the case.
Does Chesapeake have a lot of debt? Yes.
Is Chesapeake being strained by low natural gas prices? Yes.
Can Chesapeake manage through these issues? I certainly think so.
I think that because Chesapeake has assets. In fact Chesapeake may very well have the best set of oil and gas assets in the United States today. And those assets are likely worth multiples of the current stock price and debt level.
I've compiled below a table listing those assets that Chesapeake has in leading unconventional oil and gas plays across North America. The values assigned to the oil plays are from Chesapeake's most recent investor presentation and I think those values are pretty fair based on industry transactions. The values assigned to the natural gas plays are based on Joint Venture transactions entered into by Chesapeake.
Play | Net Acres | Value Per Acre | Value of Acreage |
Eagle Ford | 475,000 | $30,000 | $14,250,000,000 |
Utica Shale | 900,000 | $13,000 | $11,700,000,000 |
Mississippi Lime | 2,000,000 | $7,000 | $14,000,000,000 |
Anadarko Basin | 1,000,000 | $8,000 | $8,000,000,000 |
Niobrara | 350,000 | $6,000 | $2,100,000,000 |
Permian Basin | 1,500,000 | $6,667 | $10,000,000,000 |
Marcellus | $7,000,000,000 | ||
Haynesville | $13,200,000,000 | ||
Barnett | $6,800,000,000 | ||
Total | $87,050,000,000 | ||
Net Debt | $17,000,000,000 | ||
Value for Shareholders | $70,050,000,000 | ||
Shares Outstanding | 769,000,000 | ||
Value Per Share | $91.09 | ||
Share price | $14.81 |
It is important to note that the gas plays (Marcellus, Haynesville and Barnett) transactions occurred at higher natural gas prices, so a haircut on them may be prudent.
However if you even reduced the value of the gas plays to zero, the value per share figure would still be almost $70 per share.
Now don't get me wrong, I don't think Chesapeake could sell itself for $70 or $90 tomorrow. But I do think that it is fairly obvious that the company has a huge amount of value tied up in its assets. You can cut my estimate in half and still have a valuation three times the current share price.
And that is why I think this company can manage through 2012, and that the media is greatly exaggerating the situation facing Chesapeake. As long as Chesapeake can maintain sufficient liquidity, the company should have no problem selling a small portion of its assets to both reduce debt and ramp up its transition to more profitable liquids production.
What might be an even better approach for Chesapeake is to go ahead and sell more property than it needs and put any balance sheet issues to rest.
The current monetization plan which will raise roughly $12 billion includes selling the Permian Basin assets as well as the Mississippi Lime, where Chesapeake, Sandridge (SD) and emerging smaller players like Petro River USA have accumulated valuable acreage.
Why not expand this monetization plan? Why not sell 50% of the Mississippi Lime instead of the usual 25% that Chesapeake sells in a Joint Venture deal? Why not bite the bullet and sell all of the Eagle Ford or the Utica? Yes it would mean giving away upside in those properties, but it could totally remake Chesapeake's balance sheet and remove this awful discount on the value of Chesapeake's assets.
I've followed Chesapeake for a long time. There is a lot in the media these days about the company, but most of it is from Talking Heads who have five second attention spans. They like to refer to Enron and use phrases like "death spiral". I think these people are creating an opportunity by driving down Chesapeake's share price to these levels.
It doesn't take a whole lot of imagination to see how Chesapeake can use its massive asset base to get through this period of low natural gas prices. I'm ready to plug my nose and buy, and would be even more willing if we (shareholders) can get some new blood on the Board of Directors to help us.
Disclosure: I am long CHK.
