After nearly a year of high profile struggles in the media and on the stock market, Chesapeake Energy (CHK) might finally be ready for its comeback. Several major announcements in the last month are helping to prop up the formerly flagging stock, although investors appear to be waiting for CEO Aubrey McClendon's replacement to view Chesapeake as a top stock pick once again.
Asset Sales Needed, but Not Doing Any Favors
Chesapeake is finally making progress on its major asset sales. Majors Royal Dutch Shell (RDS.A) and Chevron (CVX) and private firm Enervest Ltd. entered into separate deals to purchase nearly all of Chesapeake's Delaware Basin assets, located within the Permian Basin. Chesapeake will maintain the leases to about 470,000 net acres in the Midland Basin, though it is not discounting the possibility that these acres could be held out for sale in the future. Further leasehold in the Utica Shale and other non-core assets is also set to exchange hands.
Chesapeake is also exiting the midstream, through the sale of "substantially all" of its midstream assets to Global Infrastructure Partners in deals worth $3 billion. The deals include assets in virtually all of Chesapeake's major plays. Further assets in the Mid-Continent and the Eagle Ford Shale will be sold to two other as yet unnamed firms in the coming months.
I think that the midstream exit is one of the smartest moves by Chesapeake so far this year. As one of few assets Chesapeake owned not substantially encumbered by revolving credit facilities, the assets were able to fetch a price nearly equivalent to their value to Chesapeake, and which according to the most recent reports were not offsetting Chesapeake's losses in any meaningful way. As Chesapeake stated in its initial offering of the assets, the sale allows Chesapeake to refocus on its core business - exploration and production, not processing and transportation.
Chesapeake will be receiving approximately $3.3 billion for its Permian Basin assets, far below the $5 billion McClendon previously indicated was the minimum the assets were worth. The total $6.9 billion Chesapeake estimates will be raised by these sales, of which 87% it expects to receive in cash at closings within the next thirty days, gives the firm the minimum cash margin it needed to end 2012 as a solvent concern. I believe that this factor more than any other pushed Chesapeake to give up its Permian Basin assets at a 33% discount to its original ask, since refusing to sell at the discount would essentially consign the assets to Chesapeake's many creditors.
New Appointments Sketch Out a New Focus
Chesapeake recently announced the appointment of new general counsel in the person of James R. Webb, who after four months of contracting to Chesapeake is taking on the full time role of Senior Vice President - Legal and General Counsel. This move will push former Senior Vice President - Land and Legal Henry J. Hood to a new role as Senior Vice President - Land, where he will be focusing entirely on Chesapeake's land and regulatory departments, a role to which he may be better suited.
Webb will be focusing on defending Chesapeake from allegations of legal malfeasance on multiple fronts, as Chesapeake fends off claims that it fixed land prices in Michigan with competitor Encana (ECA), investigations by the U.S. Department of Justice that its Founders Well Participation Program unduly favored the interests of CEO McClendon, and multiple civil suits alleging the firm is failing to pay on its mineral rights leases as agreed.
Amid these controversies, which contributed to the Chesapeake Board's decision to strip McClendon of his title as Board Chairman, former ConocoPhillips (COP) CEO Archie Dunham is now acting as Chairman of the Board. Dunham is showing faith in the company with the recent purchase of $1.1 million in Chesapeake stock, making his total exposure to the success or failure of the company $1.5 million. Dunham is a seasoned investor and I think that his willingness to stand behind Chesapeake (not to mention his willingness to take the Chairmanship in the first place) is an indication that there is still hope for Chesapeake's future.
The recent sales announced by Chesapeake bring the firm's total asset sales this year to $11.6 billion, still short of its affirmed goal of $13 to $14 billion for the year. Chesapeake is confirming that it still intends to reach its goal, however, indicating that further major sales are on the horizon. Although Chesapeake's funding gap for 2012 is now effectively closed barring any major industry disruptions, according to its own outlook the firm is still short of funding to the tune of $4 billion or more for 2013 if it does not enact further asset sales.
Chesapeake is currently trading around $19 per share, with a price to book of 0.9 and a forward price to earnings of 10.0. Encana is trading around $22 per share, with a price to book of 2.4 and a forward price to earnings of 41.5; this is a premium, but a lower cost of ownership than seen in recent weeks. For comparison, Shell is changing hands around $71 per share, with a price to book of 1.3 and a forward price to earnings of 11.2. Chevron is trading around $118 per share, giving it a price to book of 1.8 and a forward price to earnings of 8.7.
Chesapeake did not see the bounce in stock price many anticipated after its recent announcements, and I attribute at least part of the investor reticence to the shadow of McClendon. McClendon's actions over the past year at least fueled, if not directly caused, many of Chesapeake's current woes. Additionally, as Chesapeake refocuses on its core business with new leadership, McClendon's most vaunted skills - those of champion investor and financier - are becoming obsolete to Chesapeake's needs.
2013 will be a make or break year for Chesapeake, since it still has many legal and financial obstacles to overcome. That makes Chesapeake a tentative hold until its future looks brighter.