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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