Wow! What a rollercoaster ride for Chesapeake (CHK). The media has jumped all over this company making it seem like every employee should be locked up for life. Of course, we have seen the same with companies like BP (BP) (Deepwater Horizon fiasco) and Exxon Mobil (XOM) (Exxon Valdez), and both of those came out more profitable than ever.
It is true that the company has its problems and that investors must be wise about the direction of the company and about who is giving those directions. With Chesapeake, I believe the company is in a great position to invest into now. The plays are solid, the company has a great foundation, and the financials will improve. I lean toward what Warren Buffett says about investing. We should buy when people are freaking out, and sell when people are all hyped up about a stock. OK, not his exact words, but it does apply to Chesapeake and this situation. I believe that this is a company to buy now and stay with for a very long time.
There are several things Chesapeake has been doing to get itself back on track, as well as factors that point to it being a good investment right now. First, Chesapeake remains the largest independent natural gas producer in the U.S. With natural gas near an all time low, Chesapeake has not been able to profit from it. At the same time, Chesapeake is cheaper than it has been in a very long time. Needless to say, this could be a huge value play.
Second, the company is trying to make up for the recent mistakes of its leaders. Chesapeake recently named a new Chairman of the Board to replace founder Audrey McClendon and also named four new board directors after a series of corporate government issues. The new chairman, Archie Dunham, does not have a prior relationship with Chesapeake, but is a veteran of the energy industry and a former CEO of ConocoPhillips (COP). McClendon has relinquished the position of Chairman, but remains a Director and will continue to serve as Chesapeake's Chief Executive Officer and as President. In a statement by the new CEO, Dunham said, "I am honored to join the Chesapeake Board in the new role of independent Non-Executive Chairman and I am excited about the exceptional opportunities ahead for this high-potential company.
"Under Aubrey's leadership, Chesapeake has built an extraordinary portfolio of natural gas and oil assets in creating one of the world's leading energy companies. As I evaluated this opportunity, I was attracted by the clear mandate to provide strong oversight while working closely with the company's exceptional management team, talented employees, and reconstituted Board in a situation where we have the opportunity to create substantial value for all shareholders in the years ahead." While this may not be enough to sway some investors, it did please the second largest stockholder, Carl C. Icahn, who commented, "We believe Chesapeake is now heading in the right direction. With the Board providing strong oversight, the management team will be sharply focused on realizing the value of its assets and the company will be well positioned to create substantial value for shareholders going forward."
The company knows the importance of providing great returns for its investors and is trying now to do the right thing and make the right moves necessary. To make up for financial mistakes of the recent past, Chesapeake earlier this month said it would sell up to $11.5 billion in assets including pipeline and related assets to Global Infrastructure Partners for more than $4 billion. The company also said it is looking to sell 1.5 million acres of lease holdings in the oil-rich Permian Basin and about 337,000 acres in Ohio, while trying to find a joint venture partner in the liquids-rich Mississippi Lime Basin. Sinopec Shanghai Petrochemical (SHI) said that it would be interested in contemplating a multi-billion dollar bid for Chesapeake's assets. In addition, the company has put 504,000 acres in the DJ Basin in Wyoming and Colorado up for sale as well to help cover some of the $9 billion funding shortfall.
Still, the company is the second-largest producer of natural gas, a Top 15 producer of oil and natural gas liquids and the most active driller of new wells in the U.S. Year on year Chesapeake had little change in net income that was from $1.77 billion to $1.74 billion despite revenues that grew 24.23% from $9.37 billion to $11.64 billion. One contributing factor has been an increase in the cost of goods sold as a percent of sales from 49.22% to 57.02%. Last year, the company increased its cash reserves by 244.12%, or $249 million and the company earned $5.90 billion from its operations for a Cash Flow Margin of 50.73%.
Additionally, the company generated $158 million cash from financing while $5.81 billion was spent on investing. The company has a Debt to Total Capital ratio of 40.91%, a lower figure than the previous year's 66.12%, but is subject to change in the next quarterly review due to the shenanigans. Chesapeake had first quarter 2012 revenues of $2.42 billion, 11.29% below the prior year's first quarter results, and it had revenues for the full year 2011 of $11.64 billion, 24.23% above the prior year's results. The company did recently announce that its Board of Directors has declared a $.0875 per share quarterly dividend to be paid on July 31st, 2012.
Able to still compete with the likes of Anadarko Petroleum (APC) and ConocoPhillips, the company has a lot of good going for it. The company still has its 2.2 million net acres in natural gas shale resource plays in the U.S. on which they have identified approximately 13,250 net drilling locations to develop 10.4 tcfe of total proved reserves and approximately 56 tcfe of risked unproven resources, and they still have the largest inventories of onshore leasehold of 15.6 million net acres and 3-D seismic, or 31.8 million acres in the U.S. On this leasehold, they have identified an estimated 39,400 net drilling locations on which they can develop approximately 9.7 tcfe of proved undeveloped reserves and approximately 112 tcfe of risked unproven resources.
The fallout of the company's leadership team is still to be determined, but I argue that the fundamentals of the company are still there and that if and when the right people get into the right positions of leadership, Chesapeake will be sailing high again and back on top. Buying now is simply a wise investment for a brighter future with bigger returns.