The article is below. Shades of a Houston energy company a few years back....

ANALYSIS-Chesapeake Energy's ambitious plans stoke caution
Tue Jul 15, 2008 9:21pm BST
By Anna Driver

HOUSTON, July 15 (Reuters) - Chesapeake Energy Corp (CHK.N: Quote, Profile, Research) has loaded up with debt, made big share issues and executed complex deals to fund an aggressive growth plan that has helped to drive its share price up as much as 88 percent this year.

But not everyone is buying its strategy.

A growing number of analysts and investors are questioning whether the natural gas exploration and production company is taking on too much risk, a concern exacerbated by the less-than-transparent nature of its financial disclosure.

Chesapeake's move is a big bet on the future of natural gas, which saw U.S. cash market prices surge 85 percent in the first six months of the year on lower-than-normal inventory levels and weak imports.

The company, led by outspoken Chief Executive Officer Aubrey McClendon, is spending heavily to develop a natural gas field in northern Louisiana called the Haynesville Shale. That field, according to McClendon, may be the most significant find in the company's history.

To pay for the exploration of Haynesville and other emerging fields, Chesapeake has borrowed billions and is monetizing assets like leaseholds in intricate deals at a time when other exploration and production companies are flush with cash due to record energy prices.

Chesapeake aims to be the largest natural gas producer in the U.S. in the next year or so. To help it get there, the company plans to spend $13.5 billion on drilling and leasehold activity in 2008.

Currently, Chesapeake is the the third largest U.S. natural gas producer, behind BP (BP.L: Quote, Profile, Research) and Anadarko (APC.N: Quote, Profile, Research), according to first-quarter data.

"Aubrey is developing an extremely complex set of financial vehicles to finance these things," said James Halloran, energy analyst with National City Private Client Group, which owns Chesapeake shares.

"He's willing to operate a little differently, but he doesn't go off and buy bad properties. But I don't think he's done a good job keeping investors in tune with what his financial vision is."

For example, Halloran said the company's profit and loss statement is in constant flux, so investors never really understand what Chesapeake's costs and revenue are.

Efforts to reach Chesapeake for comment were unsuccessful.

In the first quarter, Chesapeake reported a net loss of $143 million because of its hedging activities, but production -- a figure closely tracked by Wall Street -- soared 31 percent to 2.2 billion cubic feet equivalent per day.

In a July 7 filing with the U.S. Securities and Exchange Commission, Chesapeake said the regulatory agency's staff had made inquiries on a number of issues including its reserve replacement ratios, the company's cash situation and a recent volumetric production payment, under which the company sold future natural gas production.

In response, Chesapeake said it believed its financial statements comply with all SEC and accounting regulations.

Based on Tuesday's close, the stock is up 52 percent at $59.49 year-to-date, compared with a 15.5 percent gain in the American Stock Exchange index of natural gas companies .XNG.

EXPOSED?

McClendon, dubbed "Mr. Gas" in a recent profile in Fortune magazine, is natural gas' biggest cheerleader in the U.S. and he aims to position Chesapeake as a "first mover" in hot areas like Haynesville and the Marcellus Shale in the northeastern U.S., an expensive proposition in an era of skyrocketing costs.

"I think their risk levels are higher as they look to exploit some of these new opportunities," Adam Miller, analyst with Fitch Ratings, said. "Any time you go into a new basin there are elevated risk levels."

Miller added, however, that Chesapeake is taking action to lay off some of the risk, citing the company's recent deal with Plains Exploration & Production Co (PXP.N: Quote, Profile, Research). As part of that deal, Plains agreed to acquire a 20 percent interest in Chesapeake's Haynesville Shale leasehold for $1.65 billion in cash.

Still, Fitch rates Chesapeake's debt BB, or speculative, with a rating outlook of "negative."

The company's actions this year show its voracious appetite for capital. In April, Chesapeake issued 23 million shares and in May it completed public offerings of $800 million in debt and $1.38 billion in convertible notes, for aggregate proceeds of $3.15 billion, according to SEC filings.

And only this week, the company announced another stock offering that is expected to raise about $1.6 billion.

"They have a very aggressive plan," Carl Blake, senior high-yield analyst with Gimme Credit, said. "But it's a growth company and they are going to need the capital. And if the market is going to give them money, they are going to take it."

In a note to clients on Friday, Blake said that while he applauded the company's recent credit quality improvement, he does not believe "this trajectory is sustainable, given the company's insatiable appetite for growth and its proclivity to spend more cash than it generates."

Argus Research analyst Phil Weiss on Friday also lowered his rating on Chesapeake to "hold" from "buy," citing worry over the company's "burgeoning cash needs."

And Chesapeake's borrowings -- it had $13.3 billion in long-term debt as of July 7 -- leaves the company more exposed if natural gas prices, which have become volatile, tumble.

"In an environment where you might get pinched because of declining revenue, Aubrey's got more debt to cover than anyone else," said National City's Halloran.

He said his biggest fear is that the natural gas market reaches a point of oversupply, a possibility in an era where many companies are drilling to achieve double digit production growth.

Even so, Halloran is hanging on to his Chesapeake shares.

"I don't always like what Aubrey does, but I think he understands the gas cycle and he has good people behind him," the analyst said. "You are either in for the ride or you are not."

(Editing by Phil Berlowitz)


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Since this started I've been saying Chesapeake is "betting the farm" on the HS and this validates it. But I think its a good bet, I just can't imagine a situation where natural gas prices drop substantially. I don't think this is Enron Part 2. By the way, did you know EOG is what was left of Enron? A lot of people don't know that.
EOG (originally Enron Oil & Gas) was spun off long before the collapse and was always a very successful part of the company. Other parts such as Houston Pipe Line were also sold prior to the problems because they were not considered to be strategic assets.
I've been tempted to steal one of the old signs that said Enron off of one of their pipelines, you can still see them in parts of Panola County on the pipeline risers out in the woods. But all their visible from the road signs just say EOG, like they don't want any association with the name Enron. Every time I see a sign from a now defunct company I want to get it, just for a collector's item. But I'm an honest man so I don't.
so, if you had substantial stock in ENRON...is there hope in EOG helping you out or is EOG just considered a separate entity non affiliation?....I took a huge huge loss in the market due to enron but my stock shares just sit there anyway...bleeeeeh

natch
Natch, EOG has no affiliation with Enron so sorry about your stock.
Chesapeake 's current strategy is very different from Enron. Chesapeake is very open about what they are doing if you read just a little between the lines. They are being both criticized and praised for their aggressive approach. Most public companies do not like to grow too fast. They would rather grow a little this year, a little next year, and so on. Chesapeake realizes the current opportunities do not come along often. Chesapeake & McClendon are in a position to take advantage of it and they are doing just that. It does expose them to risk, but they think the risk is worth it.
Mit, you didn't really say anything of substance. CHK is, by no stretch of the imagination, recklessly pursuing growth. They're a very risky bet as a company and conditions beyond their control can wreck their company.

With rising energy prices and a perfect haynesville shale, they'll be just fine. That said....

Herefordsnshale - to your point. If you can't imagine a scenario where ng prices drop dramatically, then I have a bridge to sell you. As the article stated, when these companies are looking to grow production at double digit growth rates, it won't take long before supply outways demand, especially in an economy that has put the breaks on. And in the commodities game, the pendulum swings - all the money moves from one side to the other. Many economists have pointed out that if and when the oil supply catches up with demand, we could see oil prices down 50+% in a short period of time.

I understand where the market is today and what you think will happen based on today's market, but what will the new twist be in 6 months?

With the breakdown of so many areas of the market in recent months, don't you think there's been some irrational exuberance and over-investment?

I believe they are priced for perfection.
I'll grant you it's possible, but it's very unlikely. Very few experts seem to think oil supply is going to catch up with demand for at least three years. Our demands are growing and so are the demands of other developing countries. I don't see natural gas demand dropping either. We are importing huge amounts from Canada and other places now. Until a viable source replaces fossil fuels, I just don't see demand dropping off. Ethanol is definately not going to do it and (with all due respect to Mr. T. Boone Pickens) I have my doubts about wind and solar energy. Alternative sources are decades away and until then, fossil fuels will continue to be in demand.

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