Monica Verma

Chesapeake Energy: Q2 Earnings Review

There are a few other salient points to add to the CHK story. First, it announced a partnership/sale of its shallow Appalachia assets in what looks very much like a VPP set-up. This helps with cashflow and funding of capex while retaining operational and hedging control, two things at which the company excels.

Second, the company is issuing more convertible debt. I am always surprised by the negative reaction to this for a company such as Chesapeake. Convertible debt markets are currently attractive and there is no guarantee that credit will be so readily available at such levels in the next few years. The company has capitalized on this by issuing long dated convertible debt to buy major asset positions and now to accelerate drilling. As you say, they truly are a drilling machine with strong deep drilling capabilities. I believe it likely that CHK will be in a strong enough position to buy them back prior to conversion.

Chesapeake Energy: Value is the Gas in the Ground

I agree with you that CHK is a great one to own. In fact, I'd say that now is the best time for an investor to get in. 1) yes it looks like a manufacturing company since it hedges a majority of expected production; but the company is still in the phases of delineating exactly how much gas it has and that number is growing every quarter
2) it is the largest driller in the US and just beginning to realize that it needs to seriously ramp up production to increase cashflows to fund capex and to really just deliver on its promise of reserves
3) it is an expert deep driller meaning it has positions in and can effectively drill the BIG wells; a company that can target wells with >5 Bcfe of reserves behind it at a fairly good cost is one to invest in
4) management just said it was open to an MLP for midstream assets, rigs/services or its mature Appalachia assets. this is perfect for a company the size of CHK b/c it has a huge inventory to drop down into the MLP for years to come.

I believe that investors are simply tired of the company not ramping its production up quickly enough and therefore assign a discount.