Confident on Chesapeake Energy - But Not on Natural Gas Prices

Includes: BP, CHK, PXP, STP, TOT
by: Devon Shire

I've followed Chesapeake Energy (NYSE:CHK) for quite a few years. I've owned shares at times but I don't currently. If I were bullish on natural gas, I would own a ton of it. There is no disputing that CHK is an acreage acquiring machine. There is no other company that can get out and lock down the land on an emerging play like they can.

The recent joint venture agreements that CHK has entered into with some of the largest energy producers in the world give us a pretty easy way to value the company.

Here are the 4 major joint ventures:

  1. Marcellus JV with Statoil - Statoil (STO) paid $3.375bil for 32.5% of CHK's Marcellus acreage. That implies that CHK's remaining acreage is worth $7bil.
  2. Haynesville JV with PXP -[PXP]] paid $3.2bil for 20% of CHK's Haynesville acreage. That implies that CHK's remaining acreage is worth $12.8bil.
  3. Barnett JV with Total - Total (NYSE:TOT) paid $2.25bil for 25% of CHK's Barnett acreage. That implies that CHK's remaining acreage is worth $6.75bil.
  4. Fayetteville JV with BP - BP paid $1.9bil for 25% of CHK's Fayetteville acreage. That implies that CHK's remaining acreage is worth $5.7bil.

Now add those up and it suggests CHK is still holding $32.25bil worth of property in these four areas.

  • Value of CHK remaining assets in these properties - $32.25bil
  • Less total debt of company - $11.6bil
  • Total Net asset value - $20.65bil
  • Fully diluted shares - 758mil
  • Value per share - $27.26
  • Current share price - $22.00

Using a very objective measure (prices that profit motivated 3rd parties are willing to pay), we can conclude that the value of CHK's Marcellus/Haynesville/Barnett/Fayetteville properties less debt is considerably more than the current share price.

Now the kicker. These are only four of CHK's properties.


  1. The company had 15.8 tcfe of proved reserves as of March 31, 2010. Only 8tcfe of it related to the 4 properties discussed above.
  2. The company controlled 13.9 million acres as of March 31, 2010. The four properties above represent 2.6 million acres of it.

If these four assets represent half of CHK's proved reserves and are worth $32bil, and we assume that the other half of the proved reserves are worth only half as much (properties likely don't have the same upside), that would still be $16bil. That is another $21 per share.

So if you are buying shares today, you basically get to pay less than BP/Statoil/Total/PXP did for the 4 big shale properties, and pay nothing for everything else that CHK has.

I'll cover this going forward. As I said, I don't currently own it mainly due to a lack of confidence in any improvement in natural gas prices.

Disclosure: No position in CHK