Chesapeake Is Not Going Bankrupt, And Other Exciting News
December 9th, 2008 stoon Posted in Uncategorized |

Chesapeake Energy Corp.’s mea culpa by cancelling its announced distribution agency agreements and cutting the planned shelf registration by half in a week’s time is a fast act of strategic response in a fluid environment. The retrench is merely a minor adjustment for a company caught in a cash pinch and ferociously fighting its way out of a predicament against impossible odds.

CEO Aubrey McClendon concedes the market response to the filings were “obviously very negative” and that management underestimated the response. “Our intent was to create broad financial flexibility for an uncertain economic environment and commodity market environment over the next few quarters. In retrospect, we made a mistake.”

It was only a mistake because it didn’t work. The strategy to raise $1.8 billion in equity was actually quite shrewd for keeping the cash flowing for a company addicted to running and gunning, and facing a $2.3-billion budget shortfall at $6 gas. Problem was, investors didn’t like the idea of their shares being diluted and dumped them fast, causing a share value tank from $20 to $11 in the ensuing week.

So, short of that source of capital, liquidity remains an issue at Chesapeake. Analysts at Tudor, Pickering, Holt & Co. suggest the pre-Thanksgiving shelf offering on the heels of a $1.25-billion sale to StatoilHydro illustrates the company may need even more cash NOW to get it through the fourth quarter. It also illustrates that the debt markets are still closed to Chesapeake, bought deals are still unavailable (”ibanks have no money”), and the asset sales market is very, very weak. “Liquidity could be worse than expected.”

But Calyon analyst Jeb Armstrong analyzes the spector of Chesapeake facing bankruptcy as remote. Current snapshot: Chesapeake is sitting on $1.5 billion of cash in the bank and should end the year with $2 billion to $2.5 billion when VPP#4 in the Anadarko Basin closes. Switching gears and transforming the South Texas asset divestiture to a VPP could raise an additional $450 million. Armstrong says more VPP sales over the next two years along with the sale of an interest in its midstream assets (ongoing) could even double its cash balance. If the credit markets begin to thaw, he says, Chesapeake would likely use the cash to begin paying down the $3.5 billion balance on its credit revolver. Now, he chides, “management must show that it can maintain financial discipline and wean itself from capital markets.”

In lieu of not having the potential cash from the equity issuance, Chesapeake has instead followed the hard march of its peers—painfully cut 2009 capex by 31% to match cash flow for a total capex of $3.8 billion, reducing growth forecasts to 5-10% in 2009 and 10-15% in 2010. Significantly, it also whacked its leasehold and producing properties acquisitions budget by 78%, or $2.2 billion over the next couple of years.

So, we can expect Chesapeake to be mostly quiet this coming year in acquisitions and to tend to the drilling while the economic markets shake out and investors regain their confidence in the company.

Yeah, that’s believable. While I don’t have an inkling what it might be, we can always count on Chesapeake to push the margins to produce some excitement. McClendon will pull another rabbit out of his hat, and we’ll be off to the races again.

Steve Toon, Editor, A&D Watch; The A&D Center, www.A-Dcenter.com; Contributing Editor, Oil and Gas Investor; www.OilandGasInvestor.com; stoon@hartenergy.com