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Elliott Gue  

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  • Solid As Granite: Chesapeake Trust Ramping Up Distributions [View article]
    Thanks for the additional comments. I do try to respond to comments on my Seeking Alpha articles though sometimes it does take me a few days. I have continued to write about $CHKR both in free forums such as the SA columnist conversation and on my publishers website Investing Daily. Here's an example of the latter from late April:

    I do not believe what I publish on SA is at all "fluff." The articles I post here are either completely original for this website or are gleaned from the pages of newsletters I write. Of course, I offer more frequent advice/updates for readers of my subscription-based publications but I do believe I have been quite responsive to readers' comments and questions on SA.

    Finally, I am not part of any investment company that invests in MLPs and the positions I disclose in my writings are my personal portfolio holdings.

    Here's my latest take on $CHKR:

    Units of Chesapeake Granite Wash Trust (NYSE: CHKR) have sold off for two reasons. First, the trust’s sponsor and parent, Chesapeake Energy Corp (NYSE: CHK), has been besieged by a litany of negative headlines over the past few months, including allegations that the CEO Aubrey McClendon hasn’t acted in shareholder’s best interests. These allegations have been accompanied by more pressing concerns about Chesapeake Energy’s ability to fund its planned $12 billion 2012 drilling program.

    But investors’ fear about Chesapeake Energy is overblown. Since most of its 2012 capital spending budget is discretionary, the company could delay some projects until it’s able to raise funds through planned asset sales. Any news on these divestments would be a strong upside catalyst for the stock.

    If the stock were to trade at a depressed valuation for some time, don’t be surprised if a larger integrated oil company steps in with a takeover bid.

    Bottom line: Chesapeake Energy shouldn’t have any trouble funding the wells it’s scheduled to drill on Chesapeake Granite Wash Trust’s behalf over the next few years.

    Chesapeake Granite Wash Trust’s recently announced quarterly distribution of $0.6588–about 11 percent below the target–also contributed to the selloff. Lower-than-expected price realizations on natural gas liquids (NGL), which account for about one-third of the trust’s production, were the culprit.

    Weaker oil and NGL prices may mean lead to another disappointing distribution in the second quarter, though we expect these commodity prices to recover in the back half of 2012.

    I stress-tested my valuation model for Chesapeake Granite Wash Trust by assuming that the quarterly distribution will be 15 percent below the targeted level throughout the trust’s life. I also factored in a 7.5 percent discount rate when calculating the present value of the units.

    Even with these conservative assumptions, the model yields a valuation of more than $18 per unit.

    Disclosure: Long $CHKR
    May 20, 2012. 08:39 PM | 2 Likes Like |Link to Comment
  • Solid As Granite: Chesapeake Trust Ramping Up Distributions [View article]
    CHKR provides distribution projections for the trust through its termination date. To calculate fair value I typically calculate the net present value (NPV) of all future cash flows. I tend to look at a conservative case (lower distribution projections, higher discount rate) a base case (moderate distribution projections and a slightly lower discount rate) and an aggressive case (higher cash flow projections and a lower discount rate). To give you an idea of how this works, I offer a free article showing how I value Whiting USA Trust II here ($WHZ):

    As for $CHKR my base case valuation is about $25. I actually recommended selling some to readers of Energy Strategist when it was trading in the $27 to $30 area earlier this year as to get to that valuation, one had to make some heroic assumptions in terms of commodity prices or accept a discount rate of well under 5 percent annualized. At current prices I do think it's a buy.

    And, yes, I am also talking my own book.

    Disclosure: Long $CHKR
    Apr 23, 2012. 05:13 PM | Likes Like |Link to Comment
  • Solid As Granite: Chesapeake Trust Ramping Up Distributions [View article]
    Thanks for the kind comments about my articles. The April 18th Reuters article about Aubrey McClendon's loans doesn't change my opinion on $CHKR (or $CHK for that matter) in the least. I really don't think this was much of a revelation; we've known about the CEO's deal to acquire a piece of $CHK's wells for years and his contract doesn't prevent him from taking out loans based on his personal holdings. I really don't see how this represents a conflict of interest or anything scandalous or improper.

    The article that sparked all of this appears to be just dredging up old news. McClendon has always been a controversial CEO--people seem to love him or hate him--so this article is just playing into those sentiments.

    I don not currently recommend Chesapeake common stock in my newsletter, the Energy Strategist, due mainly to the fact that I don't like their exposure to natgas prices. That said, I do think they're executing well on their plans to dispose of assets and raise capital to help fund their development plans. I do recommend Chesapeake's preferred shares in the newsletter and am happy holding onto those.

    I don't think this has any impact on $CHKR. In fact, I have recommended $CHKR as a buy only on dips under $25; I recommended taking profits back in late February/early March when its valuations ran out of control. So, yesterday marked the first time since late January where I considered $CHKR a buy candidate. I see this as a buying opportunity.

    Disclosure: Long CHKR and CHK Preferred D
    Apr 19, 2012. 04:01 PM | Likes Like |Link to Comment
  • Solid As Granite: Chesapeake Trust Ramping Up Distributions [View article]
    Thanks for the comment. I think there's some confusion here. The trust's distributions are actually likely to continue rising through 2013 and then flatten out for a bit and then decline after that. As I mentioned in the comment above, this is a function of the fact that Chesapeake Energy (CHK) will be drilling 118 new wells on the area of mutual interest before roughly June 30, 2015.

    The trust will NOT cease to exist in 2015. Rather, these wells will continue to produce and throw off cash flows that underpin further distributions. Yes, as wells mature that production will drop off over time but mature wells can remain economic for years -- there's a long tail of profitability.

    The trust will not cease to exist until 2031 so you have nearly 20 years of distributions followed by a final distribution to reflect the sale of the properties associated with the trust.

    If CHKR simply meets its targets (the first distribution was above-target), then the trust will pay a total of $17.12 in distributions per unit between now and the second quarter of 2017. After that, of course you could expect another nearly 14 years worth of distributions albeit at a declining quarterly rate. With the units currently trading in the $23 to $24 area that looks like a good deal to me.

    Generally speaking, I do tend to like new trusts (those that have recently IPO'd) the most as they have the best potential for near-term distribution growth. Distribution growth attracts investors.
    Jan 23, 2012. 01:56 AM | Likes Like |Link to Comment
  • Solid As Granite: Chesapeake Trust Ramping Up Distributions [View article]
    Thanks for the comment. A couple of points to make. First, since the market is aware that Chesapeake Granite's (CHKR) distributions are likely to rise over the next couple of years (due to Chesapeake drilling another 118 wells by June 30, 2015) and then fall after that, there's no reason that the price of CHKR's units would plummet. The market would begin to price in production declines long before they actually occur. Also remember that as wells mature, production falls but it's typically at a fairly predictable pace so these wells will continue to be economic for years to come.

    Second, absolutely it's possible that the trust could continue to throw off distributions well in excess of their target levels. This could be due to a number of factors including higher-than-forecast oil and natural gas liquids (NGLs) pricing, better-than-expected production and/or a lower-than-forecast decline rate. In fact, this is already the case as CHKR's target distribution for the two month period from July 1 to August 31 was $0.54 and it actually paid $0.58. (By the way, it's targeted distribution for the fourth quarter is $0.68.)

    Third, it's important to remember that this trust was established with two mechanisms that protect investors from commodity price volatility. First, Chesapeake ( contributed hedges that cover roughly half of production through June 30, 2015. After that the trust is not permitted to take on new hedges. In addition, the trust, like many newer trusts, has a subordinated unit structure. What this means is that of distributions fall below a minimum level (roughly 80% of the target), the sponsor (Chesapeake Energy) forgoes a portion of its distributions in order to make public unitholders whole. This structure will end four calendar quarters after Chesapeake finishes drilling those 118 new wells. The point is that starting in 2016, the trust will become more sensitive to commodity prices so if prices rise it will have a more dramatic positive impact on distributions.

    I hope that helps to answer your questions.
    Jan 23, 2012. 01:42 AM | 1 Like Like |Link to Comment
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