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Chesapeake Energy (CHK) is saddled with $1.4B of previously unreported liabilities due over...
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Thursday, May 10, 2012, 3:53 PM ETChesapeake Energy (CHK) is saddled with $1.4B of previously unreported liabilities due over coming years from off-balance sheet deals, WSJ reports. The company has commitments to banks requiring delivery of specific amounts of oil and gas. These so-called VPPs are essentially debts, with payments due in fuel rather than cash. Shares take a tumble, -1.7%.
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This news story has 54 comments:
Prior to the 1969 TRA, the sale of a production payment had to be without recourse to the seller in order to qualify for the tax benefit. If the entities that purchased CHK's VPPs can satisfy their investment only from oil and gas production; then, the situation is analogous to a non-recourse loan. In other words, CHK isn't liable to the purchaser should the properties from which the VPPs have been carved fail to return the purchaser's investment. On the other hand, if CHK guaranteed the VPPs and didn't disclose the liability, that would constitute a material omission of fact, which is referred to in less sophisticated circles as fraud.
It has been awhile since I have looked at the rules, but in times past the production going to satisfy a VPP was commonly included in a company's net production. This produces a misleading figure for net production. The same is true when companies sell carved out royalties to trusts which they then sell to investors. CHK has done such royalty trusts as well as VPPs.
Maybe including a few seasoned oil people on staff at the SEC and on the Financial Accounting Standards Board would help. The same also applies to CHK's board.
[1]http://bit.ly/IG4qSQ
Regardless, I have a conference call with the company next week, to help me further understand how the accounting behind this works. I'll be more than happy to share my findings. I have a feeling the reason these are treated the way they are is because of tax mitigation.
I also plan on discussing the slightly concerning rise in operating expense line, as well as personal use of aircrafts and other company assets. I am not a fan of these perks..Especially when we miss Q1 earnings pretty significantly.
VPP's are clearly spelled out in the 12/31/2011 10K. Pull up the PDF and search for it. Page 160 shows their VPP schedule.
"Volumetric Production Payment (VPP). In May 2011, we monetized certain of our producing assets in the Mid-Continent through a ten-year VPP for proceeds of approximately $853 million. The transaction included approximately 177 bcfe of proved reserves and approximately 80 mmcfe per day of net
production. Chesapeake has retained drilling rights on the properties below currently producing intervals and outside of existing producing wellbores and we also retain all production beyond the specified volumes sold in the transaction. This transaction was our ninth VPP. The cash proceeds for this transaction were reflected as a reduction of natural gas and oil properties with no gain or loss recognized. Other VPPs we completed in 2007 – 2010 are detailed in Note 11 of the consolidated financial statements included in Item 8 of this report."
And the reason they use the VPP is because it's optimal for tax mitigation? Which translates into a lower tax rate for the company, meaning more money for shareholders?
I would like to know what laws they have violated that should land them in prison?
I find these 'off balance sheet' debts disturbing if true. I have a call into Investor Relations and am trying to find out what is going on. Is this just more of a which hunt?
1.4B over 10 years isn't really that significant (compared to their total debt of 25B). Then they go on to say most of it comes due this year and next????? Which is it?
How did you find this out, of course you have to be a subscriber to read the whole article, pft.
Its been disclosed many times, just because people don't understand the accounting methods, does not make them wrong. The SEC and IRS have both questioned the methods of accounting CHK uses and since nothing has ever come of it, clearly it's not an issue.
Rating agencies do consider the VPP a debt which is what I think WSJ is picking up on.
I called Investor Relations, and was assured that I was not mistaken and it was disclosed many times.
After calming down and really thinking about this I knew about this to begin with, the VPP is very similar to a sale lease-back. Great way to generate income to pay down debt. Which is what CHK is doing. In fact these kinds of deals made CHK somewhere around $5-6B in revenue in 2011.
"Yesterday, we wrote about Argus Research analyst Phil Weiss' opinion that nation's second-largest natural gas producer is loaded with off-balance-sheet obligations.
"Gold's [WSJ] story now puts a figure on that sum. He reviewed 10 volumetric production payment agreements, filed in county courthouses in four states, to arrive at the total. VPPs are mortgages that use the promise of future drilling returns as collateral.
"The documents [sic] that Chesapeake's liabilities are 'far larger than previously believed by investors and analysts who cover the stock'."
Source: http://read.bi/K0EG1w
Business insider explains (via a hyperlink) in another article. http://read.bi/KOVB8N
Look I'm not trying to tell you to invest, I just happen to be long, and I don't really think these kind of things are really big issues. Analysts like to have solid number to base things on, when they have to start speculating whether to reduce revenues (based on upcoming NG deliveries that wont generate revenues), or apply it as a debt or expense. They do it the way the IRS says, bottom line. It does not make it easy for an analyst to apply. If they didn't consider the outstanding VPPs then I could see how that would be an issue for their analysis.
I think it's time we focused on the real problems at CHK - operating expenses and reducing debt. The VPP is a great way to generate revenue. They left out how much money CHK made up front for the gas they pledged.
Mostly because of the media, not because of any material issue. The VPP is a complicated program, but as both Mr Johnsons point out in these comments, hardly an issue.
So long as Q2 earnings exceed expectations, the ship holds steady, and no material events actually occur...it should continue to rise with the tide into the pre-election period...Q2 is crucial report. Should Q2 miss expectations we could definitely test the current floor, followed by a rally back into elections, followed by Q3 reporting...
I would love to hear the thoughts of a chart technician and get their point of view of where we are going. The lady Katie on Kudlow was just delightful.
We've got the next downside support at $15 based on Gould's SRL (found here: http://seekingalpha.co...). After that it would appear that $10 and $4.94 would be next.
Regards.
Goldman and Jefferies are a pretty good endorsement. They are not going to throw money into a sinking boat.
*These are my opinions and should not be taken as investment advise.
$15 was a critical support/resistance according to our analysis.
However, because $15 was violated the new support level is $10. Our suspicion is that the extreme downside target of $4.94, as indicated in our previous post (found here:http://seekingalpha.co...), is possible as well as the $0.67 downside target.
Regards.
There are couple of concerns with the view regarding the after-hours volume.
First, the after-hours volume at 1,150,602 shares was 1.31% of the total trading volume for the entire day. It can easily be said that at this point any increase in the stock price is not with the plurality of the investors.
Second, the highest price traded in after-hours was $16.46 at 4:19pm EST. This was immediately after the PR news of the loan by Goldman. It should be noted that the stock price "resisted" the $17 level. Afterwards, the stock slowly descended to the closing AH low of $15.44. This suggests that even among any involved individuals or institutions, CHK was being sold after-hours despite the "positive" news of a loan for the company.
Additionally, for better or worse, T. Boone Pickens carries a lot of weight when he enters or exits a transaction. Pickens' last major sale of CHK (found here: http://seekingalpha.co...) was when the stock was nearly $30. Considering that a Pickens sale was followed by further declines in the price, in the order of magnitude of -50%, we wouldn't be surprised to see a similar downside move from the current price.
Finally, on a relative basis, CHK appears to be replicating the movement of the period from 1993-1999 (our warning on CHK found here: http://seekingalpha.co...).
We'd be cautious of expectations that CHK will trade significantly above $17 in the short-term. Furthermore, those wishing to buy the stock, as a speculation only, should consider $10 or lower before going long.
Regards.
RWR
VPPs were timely disclosed. They are non-recourse; i.e., the purchaser can look only to the reserves. The purchasers get a specific percent of production until they have recovered a specific volume. The expected terms when the VPPs were established were from 5 to 15 years. The proceeds to CHK ranged from $2.93/Mcfe to $8.73/Mcfe. CHK's proved reserves were reduced to reflect the VPPs. See page 160 of CHK's Form 10K for more details. (No need to go to the courthouse unless you are a financial reporter trying to make a big story out of nothing..)
There was a time when financiers weren't so accommodating (or were smarter). Purchasers of production payments received a percentage of production until they recovered their original investment. The production payments were still non-recourse, but the purchasers were not at risk if oil or gas prices fell, other than it took longer than originally planned to get their money back. Production payments usually have a built in interest rate.
Never owned any CHK securities, but may consider it just because the Company is now the underdog.
Be careful what you do, or they may come after you next for some half baked conflict of interest. These people are ruthless, they shoot first and ask questions later. The media is no better.
I don't like the FWPP (hope I got that right), but I don't think that alone makes CHK a bad company.
This is a classic manulipation of the stock price by a few large hedge funds using the media. The CEO has played into their hands like a fool.
http://bit.ly/JlsB8t
RSI, KDJ, MACD and the share price are all at the bottom!