We are all familiar with the struggle Chesapeake Energy (CHK) is facing. With the combination of lagging natural gas prices and the news surrounding Aubrey McClendon, the company has been very visible and struggling. Its greatest challenge right now is meeting its funding gap. What are its options and can the company do it?
We do have new sparks flying with Carl Icahn looking for opportunity. Who can really blame him? Natural gas prices will eventually turn around. If Chesapeake can keep its core business it will be in a great position as a stock. Carl Icahn unleashed his famed activist guns last Friday when he announced a 7.6% share stake in Chesapeake Energy. Icahn called for the nomination of four shareholder-appointed directors as a first course of action to improve the struggling gas giant's waning finances and share prices. I am sure he would love to be the one to appoint them. The problem with all this position-jockeying is his letter doesn't reveal any new ideas about how Chesapeake Energy take care of its two greatest problems: overcoming a $10 billion financial hole and deal with plummeting natural gas prices crimping its cash flow. In his letter he states that "it is important that this pernicious funding gap, which we believe this board has created, must be filled." Well, it's nice to pound one's fist and make a statement that everyone already knows -- how about some answers?
The financial hole marks Chesapeake as a possible buyout target as well. McClendon is no fool; he has positioned the company well. Companies with deep pockets, like Exxon Mobil (XOM) or even Chevron (CVX), would be in a position to walk into the company. What an idea, to swoop in before gas prices rebound! SunTrust Robinson Humphrey said that a buyer would have to cope with seven joint ventures and $13.1 billion of debt. So it is a bit complicated. The company was meeting with lenders to discuss the $9 billion funding shortfall, and Chesapeake signed a pricey $4 billion loan from Goldman Sachs and Jefferies Group earlier this month to give it more time to sell assets to close its funding gap.
Chesapeake has increasingly fewer options given a weak market for gas assets and could find itself in need of selling more of its prized assets. Partnering with the Mississippian JV could bring in $500 million in cash, but this is nowhere near enough. Before the year is over, Chesapeake Energy has to raise at least $7 billion in asset sales and an additional $2 billion in 2013 to agree to its credit-line covenants. What may it be willing to part with? The company's Permian Basin fields in Texas could bring in $5 billion, as well as the $500 million from the sale of its joint venture in its Mississippi Lime fields in Oklahoma and Kansas I already stated earlier. Other than these, there is not much visibility. Beyond taking a shortfall, Chesapeake may have to part with some assets it really does not want to -- namely, the Ohio and south Texas undeveloped oil-shale fields.
Regardless of the sparks that fly and the ongoing Carl Icahn saga, Chesapeake Energy is going to be challenged to meet its funding obligations. With rumored talks of being a takeover candidate and the need to possibly sell some prime real estate it does not ant to part with, the company definitely has to wrestle with some difficult decision making. We will see what the rest of the year reveals.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.