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And now to the rescue: Chesapeake Energy (CHK) says it's gotten a $3B unsecured loan from...
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Friday, May 11, 2012, 7:20 PM ETAnd now to the rescue: Chesapeake Energy (CHK) says it's gotten a $3B unsecured loan from Goldman Sachs and Jefferies Group, to be repaid from those 2012 asset sales.
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"The new facility, which ranks pari passu to Chesapeake's outstanding senior notes, matures on December 2, 2017 and may be repaid at any time this year without penalty at par value and carries an initial variable annual interest rate through December 31, 2012 of LIBOR plus 7.0%, which is currently 8.5%, given the 1.5% LIBOR floor in the loan agreement. During the remainder of the year, Chesapeake plans to complete asset sales totaling $9.0-$11.5 billion and intends to use a portion of the proceeds from these asset sales to repay the loan. Chesapeake has received strong interest from prospective buyers of its Permian Basin asset sales process and its Mississippi Lime joint venture process, and the company expects to complete these two transactions in the 2012 third quarter. "
And as ShipOfFools points out, their off balance sheet assets are fairly large.
I have never seen so much ignorance about CHK's business as has been displayed on these pages recently. Do you people actually buy stock without knowing what you are investing in?
For your info CHK has been selling assets that are unneeded in the future. They are holding on to assets where they will be either #1 or #2 in the various fields they are retaining. Since CHK was early in securing leases in these prime fields they bought these leases for hundreds of dollars and they are now worth thousands of dollars. THIS COMPANY HAS HUGE ASSETS! After all they just got a 3 BILLION UNSECURED LOAN so Goldman and Jefferies must think they are good for it.
Most of you are overlooking the deal of the year. Go buy that inflated Facebook offering (which I wouldn't touch). I'm adding substantially to my CHK position because they have the assets.
BTW, this company was built by Aubrey and Ward. Ward has left to build up another company (SD). How many of you have taken $50,000 and built it into the #2 producer of natural gas with increasing quantities of crude. I have no problem with Aubrey's founders program or his loans. He has made me a lot of money over the 10 years I've been investing in this company and I'm confident that the payoff will be richer in the future.
Bob Doeden
I feel like half the time I'm talking to the wall.
And if I were you, since you were one of the lucky ones to be invested when it was a <$10 stock, I would be selling before it makes the round trip back below <$10.
If you want to tear up, and applaud McClendon as some sort of oil & gas hero, that's your business. I'll send you a CHK t-shirt, just don't wear it around in town, might anger the locals.
Here are the ice cold facts: (the ONLY thing people remember)
Chesapeake Energy Corporation has a Free Cash Flow of -3.175B, (clean your eyeglasses, and read it again) -3.175 BILLION USD
AND..... a crappy little Mkt Cap of UNDER $10 Bil USD, ($9.818 Bil USD) hardly a success story.
more bad news includes:
1 Month Stock Returns -26.20%
Year to Date Stock Returns -33.51%
1 Year Stock Returns -52.07%
3 Year Stock Returns -33.81%
52 Week High 35.75
52 Week Low 16.35
Still want to tell us how great they are? People are lining up to jump out the window on this, c'mon.
GS doesn't offer you a $3 Bil USD Unsecured Loan, unless they smell blood in the water. That is their model, it never deviates.
It's not about saving CHK, it's about what's on the backside for GS.
This company is facing collapsing revenues in its core business and selling assets at fair value will be impossible given that the buyers know the company is over-leveraged.
Any company that depends on creative financing is likely to get destroyed at some point.
And corporate governance has been a downright disgrace.
It looks closer to a short than a buy ...
Yes there were some conflicts of interest 4 years ago, but not like it never happens, just look at green mountain today. He was wrong about the maps, he had to buy them back, he shouldn't have leveraged his wells on his stock (he paid dearly for that trade, and the 100M bonus, didn't do much to make up for the nearly 1B in losses).
Yes he should have kept the company private, I would be willing to bet that he has a certain amount of regret, but going public assisted with the critical mass needed to grow the company to the #2 producer in America.
I don't understand why it is so hard to see that the founders drilling program was in our best interest. If Aubrey has skin in the game he is going to make sure that he has the best people selecting the drilling sites. After all he has to pay 2.5% of the drilling cost.
I recognize that Aubrey was not perfect but if you had a normal buttoned down manager running this company it would most likely be one of a thousand small E & P's instead of being a giant in finding oil & gas. Recognize talent when you see it and overlook the nickle & dimes.
Bob Doeden
"It is important to note that negative free cash flow is not bad in itself. If free cash flow is negative, it could be a sign that a company is making large investments. If these investments earn a high return, the strategy has the potential to pay off in the long run."
Please take into consideration the huge investment adding liquids to the company and the rising/normalizing of NG prices. If negative free cash flow was happening for a considerable amount of time, then I might worry a little more.
Are you so amoral with respect to ethics as long as you're getting your cut?
I'm just not willing to bet on this company in its current state.
http://bit.ly/J8IK4g
The Volumetric Production Payments - An Effective Monetization Strategy at the IPAA Private Capital Conference in 2006 by Paul Riddle is a great resource for not only companies that participate but projections, estimates and reasons to use VPP over straight asset sales. (have to google it, its a pdf)
GMX - http://bit.ly/JwXTek
Valero - http://bit.ly/J8IK4m
KCS - http://prn.to/JwXTem
CHK - http://bit.ly/J8IL8s
Pioneer PXD - http://bit.ly/JwXQ2n
SPV and UBS - http://1.usa.gov/J8IK4s (letter from the Federal Reserve RE VPP)
Great article on tax advantages and benefits http://bit.ly/JwXTep
Goldcorp (2 VPPs) 29% $997M
Lundin Mining (2 VPPs) 20% $162M
Glencore Int. AG 28% $285M
European Goldfields 27% $58M
Farallon Resources 15% $80M
Aurcana Corporation 30% $25M
Alexco Resources 25% $50M
FNX Mining 20% $400M
Redcorp Ventures 15% $90M
First Uranium Corp. 13% $125M
Silvercrest Mines 20% $12M
Luna Gold Corp. 17% $17.8M
Source: Surge Capital http://bit.ly/J8IK4u
just to name a few
I understand what Free Cash Flow means (had to look that up, huh?), and hardly need your subordinate "real estate tutelage" to quantify any remarks I make pertaining to the financial industry. I hope we are clear on that point, if we have any questions about housing, we defer those questions to you, agreed?
You boldly remarked that:
"If cash flow is negative it may be a sign a company is making investments? If negative free cash flow was happening for a considerable amount of time, then I might worry a little more."
1) Why then the push to dump $10 Bil USD in assets then?
2) The SEC has launched an informal inquiry, and the IRS is examining the well participation program, that doesn't happen for fun.
3) Debt is off the charts, prompting the asset sale. Been to any Shareholder Meetings? This has been argued about at great length recently.
4) As reported, the main problem: Chesapeake will be “sharply cash flow negative over the next three years” as it increases capex spending, forcing it to depend on more asset sales and monetizations that present a rising risk.
Fitch estimates that a $10 billion gap between cash flow from operations and capital spending and leasehold acquisitions will put pressure on the company’s credit quality. Operating cash flow for the quarter was just $910 million given weak natural gas prices, according to Fitch. Thus, capital spending and leasehold acquisitions pushed long-term debt up 23% to $13 billion.
Chesapeake also raised its capex guidance for well costs and for acquisitions of unproved properties, while increasing the projected level of asset sales. “The inventory of assets to sell is deep (Permian Basin, Mississippi Lime, Eagle Ford VPP, Chesapeake Oilfield Services IPO), but the extent of sales raises questions about the ability to execute on all of these transactions in such a short time frame, and the potential impact that sales could have on core operations and medium term growth prospects,” read the release.
Shares in Chesapeake have been on a downward path for at least 12 months. That decline accelerated around mid-March. That has been happening for a "considerable amount of time", so GET WORRIED.
This is a short in progress, most in our industry agree.
Good luck in your sector, wish you all the best.
I have no doubt that you have a crystal clear understanding of Free Cash Flow, given your extensive credentials and industry participation. For the less sophisticated and down to earth investors, I thought I would just point out that negative cash flow in and of itself is not a bad thing. No need to get all uppity regarding my background, and your comments show you know very little about the niche health care real estate brokerage industry. Valuing the business is the primary function of a health care broker. Yes we also perform the function of a real estate broker, but the primary function is an analysis and valuation of the business. (multiple owner, JVs, RIDEA structures, sale lease backs, distressed real estate sales) the majority of my consulting has been with Chapter 7 & 11, and bank directed asset (business & real estate) sales. I then get to watch new buyers turn the business around and make a huge profit. Yes my knowledge in the Oil and Gas Industry is limited as I only began really following a few years ago. And no, not agreed. I will say what I want when I want, and if I am wrong, I will eat those words.
In response to your questions/statements.
1) the asset monitization has been a big part of CHK, and they are a leader in VPP. It has contributed to their incredible growth. Also, the lowest NG prices of all time aren't helping. the company has had to be nimble and resourceful to continue to grow and position for the future, which has proven more difficult than they thought.
2) The SEC and IRS have both been working with CHK for years, regarding a variety of issues (VPP, FWPP, Accounting Methods, etc.)
3) Debt is a bit high yes, I wouldn't call approx. 60% off the charts (I wonder what you think of US debt levels). Yes it has been debated quite a bit in recent months, and CHK has done a great job so far tackling that problem. they are ahead of their debt reduction schedule. (at least before these deferred asset sales , which we wont know more about until tomorrow morning).
4) I am not sure I remember that report claiming they will be cash flow negative for three years (that seems like it might have been based on NG prices remaining depressed). I personally think we will see prices much higher in the next few years. Yes the path to reduce debt has changed in recent days, but nothing definitive was stated. They have just adjusted guidance. It is still yet to be seen how the rest of the year actually plays out. CHK could take several significant steps to turn the Titanic , if you will.
The downward path is what initially put this stock on my radar, after watching, and researching, and researching more, I tried to determine if there was a value play, and thought that was around 17-19. I think there is one here, based on my current countless hours researching this company. Some companies can turn these situations around, some can't, and as of right now, I still think CHK can. I'm more worried about the debt issue after 2015-2016, when the majority comes due.
Thanks but I don't operate on luck, it all comes down to how hard/smart you work.
Let me be clear my comments mean no disrespect, however yours really toed over the line. I like to think of Seeking Alpha as a place we can all learn and share info, not just puff our chests.
I appreciate your opinions and will take them into consideration for my investment strategy.
W
However, I wasn't puffing my chest. I was rather reacting to the fact you actually included an explanation of Free Cash Flow, in an attempt to discredit my opposing view. My people call that Chutzpah.
Let's forget us, here though.
Facts remain:
1 Month Stock Returns -26.20%
Year to Date Stock Returns -33.51%
1 Year Stock Returns -52.07%
3 Year Stock Returns -33.81%
52 Week High 35.75
52 Week Low 16.35
CHK will roll over and sink, already listing at this point.
Don't believe me? Call Goldman Sachs and ask them.
That position (CHK fail) will be made available to a top tier of investors before the end of the week, took the call myself Friday night.
I will be the old guy in the background surrounded by others, giving me high fives.
Start here.
Carl Ichan gets a call from Goldman Sachs on Friday night to take a chunk out of CHK's behind, gee didn't I just mention calls went out?
Guess what Carl "da King" Ichan will do now?
He doesn't save companies, his entire reputation was built on breaking up, and/or selling off various parts of the companies he invests in.
Looks like Carl is getting ready to hold Court again.
the BS VPP well program is very old news and Recruiters and many bears are touting like it is something no one knew about. The loans CEO took out to pay his part of the VPP 2.5% of the wells are no secret either well costs need tp be paid up front, so he had to barrow $ to pay his part.
Then the Enron stuff, nothing there either Enron was closer to UNG than CHK as far as how things worked enron was all buy energy at spot prices and reselling it they had nothing under them acreage wells production or reserves nothing other than paper volumes... just BEAR bs propaganda from all I can see.
Mark
Your comments show reserve and respect. You set a good example.
Thank you for your courteous remarks.
http://bit.ly/J4C6NA
FACTS:
1) Ichan got the call Friday, as I said.
2) I mentioned Ichan's penchant for busting things up for sale, a widely known fact.
3) He is indeed getting ready for an event, as I said.
SUMMARY: 3 for 3 pal, that's more than partly right.
- The $3 Bil USD short term loan is exactly that, only covering daily operational costs.
- I agree with you, NatGas will likely see $5 USD by end of August.
- Southeastern, Chesapeake's largest shareholder with a 13.6 percent stake, is turning activist and recommending that the company's board be open to a sale.
Please knock the article all you want, I didn't write it.
Direct this critique at the author.
1 Month Stock Returns -26.20%
Year to Date Stock Returns -33.51%
1 Year Stock Returns -52.07%
3 Year Stock Returns -33.81%
52 Week High 35.75
52 Week Low 16.35
CHK will roll over and sink, already listing at this point.
Call Goldman Sachs and ask them.
Two red flags for an investor in an individual stock is poor corporate governance and reliance on creative financing. I can think of other examples of creative off the balance sheet financing, including subprime mortgages and Enron.
I think to invest in this company is to assume disproportionate risk.
The collapse in the price of natural gas will induce industry consolidation and CHK looks like one of the 'consolidated', not a consolidator.
In December, 2012 was being touted as the "year of M&A activity among Oil and Gas E&P's", so this comes as no surprise. CHK had to be sat down and smacked.
CHK, as desperate as they are, didn't see it coming.
McClendon? Country / Western version of Madoff, nothing more.
Like trusting your double-jointed Supermodel girlfriend to travel alone, (flying for the first time ever), to be in a Victoria's Secret Fashion Show at a Viagra Conference in Las Vegas, yeah right.
Who ya gonna trust, huh?
NOBODY.
Would GS have done this deal if CHK did not owe GS a lot of money?
Very doubtful.
I think this company could be a short. It's difficult to make a decision because the financing is not transparent. But the lack of transparence is usually conscious decision by a company to hide from the market excessive leverage.
Your comments further indicate you don't know what you are talking about!
Bob Doeden
Stand in the middle of the street and wait for cars.
Yes, Master!
Even with asset sales I'm sure they will still be cashflow negative. Their planned capex for 2012 is 11.6 to 13.1B. Cash from ops is a piddly 1.1B. Asset monetizations aren't going to cover that balance.
They just took $3B in senior FIVE year notes at a floor of 8.5% to refinance a revolver that is at the max fed funds +1.75%. In February 2012 they were able to place seven year notes for 6.775%. That should tell you something about the deterioration of their credit worthiness and what lenders think.
Capital Expenditures
"In the Current Quarter, our capital expenditures for exploration, development and acquisition activities, net of drilling and completion carries, were $3.471 billion, including $2.503 billion for drilling and completion costs and $968 million for acquisitions of unproved properties. A disproportionately high percentage of our total budgeted 2012 capital expenditures was made early in the year, and this was the result of several factors which are discussed further below. Our current budget for 2012 includes drilling and completion capital expenditures, net of drilling and completion carries, of $7.5 – $8.0 billion and net undeveloped leasehold expenditures of $1.6 billion."
"During the Current Quarter, our capital expenditures related to our midstream, oilfield services and other assets were approximately $770 million. Our projected 2012 and 2013 capital expenditures are $2.5 –$3.5 billion and $2.0 – $2.5 billion, respectively"
7.5+1.6+2.5=11.6
8.0+1.6+3.5=13.1
Also, we know the transition to liquid is going to cost a bit more up front. The revenues and eventually operating cash flow will rise once the transition is further along.
Not to mention rising of NG prices
"Our current budget for 2012 includes drilling and completion capital expenditures, net of drilling and completion carries, of $7.5 – $8.0 billion and net undeveloped leasehold expenditures of $1.6 billion."
"During the Current Quarter, our capital expenditures related to our midstream, oilfield services and other assets were approximately $770 million. Our projected 2012 and 2013 capital expenditures are $2.5 –$3.5 billion and $2.0 – $2.5 billion, RESPECTIVELY"
LOW END RANGE: $7.5B D&C + $1.6B LAND + $2.5B MOO = $11.6B CAPEX
HIGH END RANGE: $8.0B D&C + $1.6B LAND + $3.5B MOO = $13.1B CAPEX
Sorry its been a 15+ hour day and the last 4 have been spent reading this freaking 10-Q and crunching numbers.
Although the capex expenditures are hardly a surprise.
The scaled back asset sales are from (i believe) $14B down to $9B.
Just saying, I don't think it's quite as depressing as you make it sound. The disproportionate Q1 expenditures helps to explain the miss in earnings. I anticipate this won't be a problem in Q2-4.
A lot of people here totally disregard the growth from the switch to liquid. CHK is a little behind the game compared to SD when it comes to liquid, but SD doents't have that many wells or interests. You give no credit to the value of their assets.
As far as subprime, my take is that CHKs BOD and CEO are being sued over (in part) "favorable loan terms." I am certain they needed to have terms that would not cause anyone to think that CHK was being favored etc. This credit line is in addition to the $5B (collective) thats it already has. Plus the Goldman credit line can be paid back at anytime without penalty.
When you compare current home rates, treasury rates etc, yes 8.5% looks a little high. But how many Americans can even get a 8.5% interest rate? This isn't subprime, it's more like proper lending for a very short term, unsecured credit line.
that is going on...could be simply a mental problem or possibly
trying to save their own asses at our expense
They are just simply running out of ways to raise money. They've VPP'd and JV'd just about every play they have. I think they are going to have trouble selling the permian for what they want for it as well. They have said it is 5% of their reserves which equals about 1 tcfe. Even if you make it all oil that is reserves of 167MM barrels. It's obviously not all oil and even if it was and you pay a whopping $50/bbl in the ground, you get $8B. If you add that to the $3B I think they could get from the VPP/JV. That gets them roughly around cashflow neutral depending on capex, but it kills one of their large oily areas thus further hurting their cashflow.
Their Western region (which includes the Permian) last quarter made 13.9 bcf of gas and 3.1 MMbbl of liquids (pretty ridiculous that this company STILL isn't breaking out oil/NGLs, there's a reason for that) for a total of 9% of their production. Since they said Permian is 5% of their production in bcfe (only 5% because they produce so much nat gas other places), obviously the Western region just isn't Permian, but its the best data we have. The Western region contributes 30% of their current liquid production and you can bet the Permian contributes a large portion of that.
You can also see from the realized prices that the Western division is where most of their oil is. $87/bbl vs mid $60s for the other regions. Obviously with WTI around $100, those other areas are heavily weighted towards NGL.
Seems to me like this is selling the golden goose.
NG prices can't go much lower, electric usage is on the rise and projected to increase 21% in 2012 (due to lower cost pf NG over coal). http://bit.ly/I5XkZL
You underestimate the future value of NG, and the usage increases that will occur in the long term. Once we are able to make Liquid NG cheaper, you will see US exports skyrocket.
The Board isn't out of control, but I think they are over compensated, and have recently sent a letter to the board. I touch upon operating expenses, BOD compensation and the letter to Obama.
I request the BOD and Aubrey give up any performance based compensation this year, and return any from last year. I also ask they give a sacrificial lamb (someone is going have to step down to calm public opinion, I don't care who, just someone). I ask for stock buyback (although the lack of funds makes this a small problem). I ask for all company employees to cease any private use of company assets. I ask for Aubrey to apologize and retract his letter to Obama (right or wrong, I think this is where the real problem started).
Just a few of these things would do wonders to calm shareholders, as well as nonshareholders. Yes there are things they can do to alleviate some of the pain we have all recently felt, I do not think there are any conflict of interest, I do not believe most the media hype. I do believe there is some agenda against CHK, just not sure who or why (possibly the letter to Obama).
2- The gap between expenses and income is widening. Thus they are forced to borrow from tomorrow to fund the gap today. Drilling $8M wells to produce $4M worth of gas is not profitable. By using volumetric production payments (VPP) they have been able to bring in income today that has to be produced in the future. Again this is a form of borrowing from tomorrow. Just because the payments are payable in fuel production of the future does not mean it won't cost them nothing.
3- Betting to generate better short term results have a tendacy to end up taking from the long term. In other words CHK shareholders value decreases with every sale or part sale. CHK is full of what I call part sales (%). And that makes it a lot harder to sell. It is only a matter of time before CHK has to go to GS to sell big parts of its holdings, which will reduce the seize of the company and stake the CHK shareholders own. This is where CHKM, CHKR, TOT, and others will have to step in and buy what best fits them.
4- If I was CHK I would do a reverse split on the common shares to finance 100% ownership of everything that is needed to drill to keep the committments to CHKM, CHKR, TOT and others. Sell the leases. Scale down now before they are forced to. This is no longer about saving CHK, it is about saving CHKR and CHKM and others that have paid up front for a percentage of production.
1 Month Stock Returns -26.20%
Year to Date Stock Returns -33.51%
1 Year Stock Returns -52.07%
3 Year Stock Returns -33.81%
52 Week High 35.75
52 Week Low 16.35
1) While CHK has been under a bear attack the future price of June NG has risen from about 1.91 to 2.50.
2) The cap ex budget is not written in stone. Lets assume for argument that CHK is squeezed (an argument I reject) they could easily defer more drilling until prices rebound taking the pressure off.
The doom & gloomers here are making a major mistake in their investment career. This is a major opportunity to increase your net worth. How much are you risking at these prices when you really look at the assets that CHK holds. Why are major energy companies investing billions with CHK ? They are paying billions for only a portion of CHK's assets. Surely the remaining portions that CHK is keeping for itself have a worth comparable to what they received from those energy companies. They have sold leases for 4-5,000 in the near past that they paid only hundreds of dollars for. The remaining leases have not dropped that much in value even though NG has dropped in price.
Remember that commodity prices are self correcting. Low prices begat reduction in supply which brings prices back to normal.
Bob Doeden
I don't know that the GS loan announcement will lift the stock but firing McClendon will get the stock above $20.
To me CHK has the same problem as the US Government has. They can't face economic reality. The reality is that financial resources are limited. We operate on a credit system. That credit system of creditism is failing do to lack of cash. You simply can't pay a credit with more credit. Only cash can do that. And cash can not enter into the system in debt free form. It has to be borrowed into existence. JPM/C trade was a bet on the direction of loan making out of credit creation. So far they lost $2B and the losses will continue. It took time to make and build up that trade and it will take twice as long to get out. To unwind that bet right now would force JPM/C to take a much bigger loss now instead of spreading it out. CHK made a bet on natural gas on borrowed money. The debt is still there, but the value of natural gas is not. And there lies the problem. Can they accept defeat and let the gas lease acerage expire?, (instead of drilling to hold by production). The next problem they will encounter is falling crude oil and liquid natural gas prices. It is like getting body slamed by the mad dog meshan. As I see it the shorters will drive the stock up the next few days and then slam it into the ground. For investors, it depends on what you want to be. If you are a client of GS you are a muppet. CHK is a GS muppet. If you nare a shareholder GS has another name, a 5 letter word I can't disclose here with the c missing. CHK is not the only stock getting body slamed in the stock market. Plunder has become a way of life on Wall Street. We now have the legal system that authorizes it, and a moral code that glorifies it. And that is why GS has that 5 letter word with the c missing to describe shareholders.
Opening what is a line of credit from GS at a variable 8.5% rate is not necessarily a good thing. People KNOW that CHK is having not just problems but HUGE problems. Do you think CHK has ANY leverage in sale negotiations? Of course not -potential buyers will bleed them for as long as they can. With gas prices at $2 and not heading much higher any time soon, no one is in a huge hurry to buy their assets.
What people fail to realize is that creditism undercuts capitalism. Creditism is the road to communism, and under communism, debt deflation destroys debt. Once the value of debt is destroyed, capitalism gets a fresh start. CHK managment has destroyed shareholder value by selling it to banksters who now have first lien on everything. There is no longer any shareholder equity. A big portion of their leases will expire worthless in the next 5 years, unless they can drill and hold by production. To do that they need $10B a year. Screwed shareholders have no way to help the company. The only option they have is to sell before all is lost.
Note I'm long CHK & gasfrack
Mark
The only reason I dont have puts in CHK is because the premium is too high. To me, the options market is pricing in a wipeout of the equity.