Link: Chesapeake Energy: Worth Just $1?


Asset sales, a stronger outlook for cash flow and falling debt improve Chesapeake’s outlook – but do not justify a premium multiple to peers. Chesapeake reported strong Q1 results along with a $470 million asset sale. Chesapeake has now announced $1.2 billion of asset sales this year with only a modest negative impact on production. We estimate Chesapeake trades at a 5-10% premium to peer group multiples of mid-cycle debt-adjusted cash flow… 

Chesapeake trades at a debt-adjusted cash flow multiple of 8.5x mid-cycle estimates – a 5- 10% premium to peers using market prices for the convertible pref notes. This multiple has fallen sharply as a result of the additional $470 of asset sales that were announced, an increase of ~$700 mm in 2016-2017 cash flow estimates and a 16% increase in 2018 cash flows. If we were to use the face value of the convertible preferreds, the premium rises to 20-25%. While we applaud the progress Chesapeake has made, we believe a premium multiple is unwarranted. We are trimming our target multiple to maintain our $1 price target.

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Possibly.  However, banks have been most accommodating to the over leveraged E&P sector for far longer than I imagined they would and continue to provide financing and cooperate with "packaged" bankruptcies. 

So the attorneys/royalty owners  who are eagerly promoting lawsuits and class action cases against CHK win the awards that will be work NOTHING if  CHK files BK. If there was ever a time not to file a suit against an energy company it is now. Most are just trying to stay solvent and any bump in their finances will throw them to BK.

He who pays the piper calls the tune.  Plaintiffs have the choice:  to settle, if an offer is tendered, or go to trial and a verdict.  When its a bird in the hand or two in the bush most plaintiffs take the bird in hand.  Altruism often fails in the face of uncertain outcome.  And any experienced trial lawyer will tell their clients there is no such thing as a sure thing in any court case.

Important to remember and take into consideration.  Chesapeake isn't a company that can write off billions of dollars in settlements like a BP.

CHK management is responsible for their situation.  Yes, its been exacerbated by falling commodity prices but CHK had a heavy hand in causing the natural gas glut.  Over aggressive land programs demand large capital expenditures to hold development rights.  Makes it hard to slow drilling when the only thing keeping the company afloat is cash flow.  Either plaintiffs have a legally persuasive cause of action, or they don't.  The courts will decide.  If CHK does not do so first by settlement or bankruptcy.  Those who have held their stock this far down the rabbit hole have little room to make a case for CHK remaining solvent.

In the Fort Worth Star Telegram the head line read, DFW  settles with Chesapeake for $52 million dollars for not properly paying royalties.  And again today, Fort Worth City Council agrees to $15 million payment in settlement of improperly paying royalties.  That is a $67 million dollar hit from just one county, Tarrant County, in Texas.  I do not think Chesapeake is gonna have a dime left to go broke on. That happened in two days.  I think the roof is caving in on them.

CHK is not responsible for the entire amount.  Yes, it's still a lot of money but it represents a drop in the bucket compared to what it would cost if CHK didn't settle and the court handed down a verdict that set a legal precedent.

You got that right.

If anyone has to worry about a run away jury, it's folks like CHK.

Hulk Hogan won $140 million for damage to his "reputation."

A properly structured verdict finding improper royalty deductions by CHK could well set a legal precedent that would be a huge blow to the entire O&G industry.  IMO any E&P company would go bankrupt before they would let that happen.  What's at stake goes far beyond CHK.

Was this a mediation settlement or a verdict?

“After three weeks of good faith mediation led by a former federal judge, the case has been resolved to our satisfaction, though it is subject to our clients’ written approval,” said George Parker Young, a partner at Circelli, Walter, & Young in Fort Worth who represents many of the plaintiffs. “We are pleased that we have achieved a mutually acceptable global settlement and greatly appreciate the constructive approach taken by Chesapeake’s current leadership to resolve this matter.”



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