Bulls remain hopeful, but I think there's a tell in these new sales indicating CHK may be headed down to zero.
The "tell" is the hype Chesapeake is giving to the sales themselves. There are separate press statements going out on each one, and the sales cover the full range of the company's assets, including the Permian Basin, Eagle Ford shale, and Ohio's Utica shale. Earlier statements from CEO Aubrey McClendon were that CHK would pursue plays higher in liquids, like these, instead of pure gas plays, given the current low price of natural gas.
The company claims it will have completed asset sales totaling $14 billion by the end of the year, causing Trefis to raise its rating, but it still needs $3 billion more in sales this year to meet that target. Forbes notes that the most recent sales in the Permian basin are priced at $3,300/acre, for acreage with daily production of 21,000 barrels/day of liquids, plus natural gas.
As Daniel Lauchheimer wrote here last month Chesapeake faces a total funding gap of $16 billion, meaning it will still be short $2 billion if it sells the $14 billion in assets it plans to this year. Cris Frangold, one of the leading analysts of basic materials here at Seeking Alpha, is right to call this an asset trap. The Tactical Investor, who is seeking a bullish case, thinks Chesapeake can add to earnings through drilling even after the current sales are completed - in other words what's left will be heavily depleted in order to meet the street's earnings estimates.
Here are the key questions for bulls. You got barely half what you expected in the latest asset sales. You still need to complete another $3 billion in sales by year-end, and some Permian acreage in the last tranche went begging. Plus there's another $2 billion in sales to be completed next year.
With prices for lease acreage plummeting, with everyone in the oilpatch knowing you have to sell, with hard deadlines looming, what kinds of prices can Chesapeake hope to get from the remaining asset sales, and what will be left of the company afterward?
Chesapeake isn't saying. It's talking about making $125 million in asset sales to Shell (RDS.A) and Chevron (CVX) and a new outfit in Ft. Worth that's just starting its IPO process, at a price that could pay for the Chesapeake acreage twice over.
In other words, that vaunted $125 million is not yet in CHK's hands, we shouldn't be heralding asset sales of that size given the cash requirements, and other assets that are going at fire sale prices.
Chesapeake presently lists $69 billion in assets on its balance sheet. That figure is as of June 30, and includes the $6.9 billion that were part of the latest sale, which fetched barely half what they were claimed to be worth. If Chesapeake has to sell $30 billion in assets to fetch about half that amount in cash by next year, what's left to drill? And where is the cash to drill it?
To me, all this spells trouble, not salvation. Bulls need to answer how much the rest of CHK's asset portfolio is worth, at current prices, and how much will be left over after the sales that must be made over the next year are completed.