Chesapeake: Is $7 Billion Enough?

Jun.11.12 | About: Chesapeake Energy (CHK)

Chesapeake (NYSE:CHK) is struggling. The company is planning to sell $4 billion in pipeline assets to Global Infrastructure Partners in order to buffer a $10 billion cash shortfall this year, which could have a significant impact on the viability of this stock option.

There are two major reasons for this funding shortfall. The price of natural gas has declined dramatically, which has affected a number of companies, including Chesapeake. In addition to this, Chesapeake's heavy spending has finally begun to have a negative impact on the company. It experienced a boom in production, which added to the mild winter in causing a significant drop in gas prices. The company also faces investor discontent related to corporate governance issues. Chesapeake became "vulnerable to the sharp drop in natural gas prices" by closing natural gas hedges last fall. This is yet another factor that is influencing the stock for the worse.

Analysts estimate that the shortfall will be almost $6 billion in 2013. In order to avoid breaching a loan covenant, analysts estimate that the company will have to sell about $7 billion in assets if it wants to stay afloat. To top it off, it seems that $7 billion may not even be enough. The company will still experience a funding shortfall, even with this money, and it will also raise doubts about its revolving credit system. The solution to this problem seems to be to sell an additional $10 billion in assets this year. In that way, the company will be in a better position financially and will have more headroom. If sales yield less than $7 billion, the company's credit rating will be downgraded. It turns out that $7 billion is essentially a bare minimum, as some analysts expect the company to experience a shortfall of about $10 billion this year alone.

This is what analysts suggest the company should do, but what is the company actually doing? Chesapeake recently acquired a $4 billion high interest term loan from its investment bankers. The company plans to repay this by selling $11.5 billion in assets. The company has put 1.5 million acres in the Permian Basin and half a million acres in Colorado and Wyoming up for sale. The Permian Basin is worth between $4 billion and $6 billion, and it could attract a number of buyers. On top of that, the company is also searching for a "joint venture partner in the Mississippi Lime basin." We have yet to see if these actions will yield the amounts required, but the company hopes to generate between $9.5 billion and $11 billion with the sales and the partnership. Some of the sales, however, may need to be postponed to retain the cash flow necessary to comply with bank covenants.

Chesapeake is also moving away from natural gas to the production of oil and other energy-related liquids, as the declining market seems to indicate that it is time for a change. However, this may be coming a little too late for investors in the stock.

BP (NYSE:BP) is finally in the news for something other than the Gulf of Mexico oil spill. It recently announced its intention to put its stake in TNK-BP up for sale. This follows reports that it received unsolicited indications of interest. We do not know who these indications are from, but it could be the company's Russian partners in TNK-BP. The sale could help the company pay for the Gulf of Mexico spill fallout, and it will release the company from its messy relationship with its partners. This could also help BP pursue other ventures that could be more profitable, and as a result, I think this will have a relatively positive effect on the stock.

Noble (NYSE:NBL) recently announced that it is selling its North Sea assets to Maersk. This is an interesting move on the company's part, but I feel that it is the most sensible one it can make. The assets in the North Sea represent some of the non-core assets the company has decided to get rid of. This will allow Noble to focus its resources on its five core business units. The strategy should also allow the company to strengthen its balance sheet. The strategy seems to be a very sensible one, and I believe its stock will be rising as a result.

Competitor Devon (NYSE:DVN) recently received positive attention by making the World's Most Admired Companies list put out by Fortune magazine. This is the sixth year in a row that the company has made it to the list. This is particularly notable because Devon is the only oil-and-gas company on this list. This will greatly improve the stock, as this kind of recognition works to continue building the company's reputation.

One competitor appears to be having great luck recently. Anadarko (NYSE:APC) has drilled a well in Arapahoe County, Colorado, that seems to be doing fairly well, as it has yielded "200 barrels of oil a day in (its) first month of production." At this stage, however, it is almost impossible to tell whether or not huge yields will continue to be found at the location. Regardless, this could be good news for stockholders, as the success of Andarko reserves could mean positive movements for the stock in the near future.

Especially in comparison to its better-performing competitors, Chesapeake does not seem to be an oil-and-gas stock that investors should consider at the moment. It is undergoing major problems, and it is very unclear as to whether or not the company will be able to bounce back from the upcoming funding shortfalls. It is making some positive efforts to help the situation, but this is not enough to draw attention away from the fact that it is in a terrible predicament. In the future, therefore, I believe this stock will continue to drop.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.