The article below explains some of the beating in the stock. Based on my back of the envelope calculations, the market is valuing the Utica acreage at less than $1,500 per acre. Assuming the world does not crumble in to ashes, this is fear and panic at its best. I guess JW is simply a fool buying the stock at these levels?
Chesapeake Looking To Sell Acreage In Ohio
Published June 04, 2012
Dow Jones Newswires
Chesapeake Energy Corp. (CHK) is putting large chunks of its holdings in Ohio's promising Utica shale up for sale, an area that is rich in profitable oil and natural-gas liquids but is still in the early stages of development.
The cash-strapped company, which needs to raise money to increase its oil production at a time when its vast output of natural gas brings in little cash, said in a prospectus Monday that it was selling the "highly prospective" acreage because its capital budget is being reduced companywide. Its plans would focus on the areas where Chesapeake land ownership is more concentrated, the company said.
The acreage offered, a total of 337,000 net acres in the Utica and Pleasant Trend fields, is the latest piece of oil-and-gas real estate Chesapeake has put up for sale as it tries to steady its financial ship, burdened by $13 billion in debt. But the fact that it has to sell acres that are potentially rich in profitable oil could have a negative impact in its future growth, according to analysts. "It's sort of a catch-22 for the company," said Jefferies & Co. analyst Biju Perincheril.
"They have the need (for cash), and you can only sell what you have to sell."
Chesapeake, the second-largest natural-gas producer after Exxon Mobil Corp. (XOM), intends to bring its long-term debt to $9.5 billion. Last week, Chesapeake put 57,000 acres of East Texas oil land up for sale. It is also selling acres in Wyoming, Colorado, West Texas and in the Mississippi Lime basin in Kansas and Oklahoma.
A Chesapeake spokesman was not immediately available for comment. Mr. Perincheril declined to give an estimate of how much money Chesapeake might garner for its Utica and Pleasant Trend land. The company has touted the rate-of-return from the crude-oil wells it has drilled in the Utica area, but operations there are still nascent--only two operating wells exist in the Utica land Chesapeake is selling. Five nonoperational wells included in the parcel are listed as having offered "minimal production volumes."
Chesapeake paid billions of dollars over the last two years for drilling rights to 1.3 million acres in Ohio, or about 5% of the state's land area. Ohio officials estimate the shale rock running under the state holds 1.3 billion to 5.5 billion barrels of oil.
In December, French oil giant Total S.A. (TOT, FP.FR) paid Chesapeake $610 million for a stake in Chesapeake's Utica acreage and promised to supply $1.4 billion in drilling and completion costs.
u obviously do not understand how an MLP works
u obviously have not read their 10k nor their presentations
as for IDRs, u should now that they've already been reset in return for class B shares so there is nothing to suspend
i suggest you do more homework before you buy. As for my interest, its a free country last I checked with freedom of speech so whether i am long, short or flat is not the issue...intelligent discourse is
""you are correct but I have never seen an MLP that doesn't pay out enough for unit holders to cover their tax liability"
I have no clue what that is supposed to mean. Taxes are deferred until your basis goes to zero, or until you sell."
CEP hasn't paid a distribution in several years yet the unitholders get positive income on the K-1 each year and have to pay taxes on it. Current year taxes are based on the MLP income and losses, not the distribution.
"Our goal is to manage our oil and natural gas properties to generate cash flows and provide stability and growth of distributions per unit for the long-term benefit of our unitholders and employees"
"you are correct but I have never seen an MLP that doesn't pay out enough for unit holders to cover their tax liability"
I have no clue what that is supposed to mean. Taxes are deferred until your basis goes to zero, or until you sell.
<They will have to borrow $100+ mn to pay the distribution>
The distribution is only around $40 million per quarter. Are you really that pessimistic that they are going to have to borrow money the rest of the year? If so, why are you invested in it (if you are), and if you aren't, why are you even discussing it?
Before they would reduce distributions, they would suspend IDRs first.
technically, you are correct but I have never seen an MLP that doesn't pay out enough for unit holders to cover their tax liability. As you can see on EVEP's website homepage, their mission statement does not say anything about stability or growth in distributions as you are quoting. As for why you would lose faith if management deemed this is a good time to reinvest in their own productive capacity is beyond me. If you are that fixated on income, you should own bonds or preferred stock instead. They will have to borrow $100+ mn to pay the distribution as it stands without monetizing assets - that is clearly why they emphasized monetizing Utica in the conf. call. Whether it is short-term or not is beyond either one of us to predict.
One thing I wonder about is valuation of the properties of CHK, Enervest and EV. Is it based on current commodity prices and the strip. I mean, those prices are down, does this affect what the properties can be sold for? Doesn't the value of the properties go down as the prices of the commodities decline?
<Doesn't the value of the properties go down as the prices of the commodities decline?>
Short answer is yes. However, as Otto has commented, there are many variables that come into play when evaluating producing/non producing properties. It is inevitable that O&G prices will eventually rise, so the present softness in price should bring out the savvy buyers.
The acreage valuation will be determined by the discounted cash flows of the properties. A DCF calculation utilizes many assumptions (interest rates, risk premium, cost of capital, oil & gas prices, etc.). In addition, when crunching the numbers, a DCF model is usually over ten to 20 years with a residual value that factors in any value beyond the forecast period.
While the current oil prices may have some impact, any buyer is going to be focused on the long-term price of oil since that is going to be the main driver/assumption of any DCF calculation. I would assume an Exxon, Chevron, Shell are looking at the Utica as a multi-decade play. If you read some of the IEA reports concerning the depletion of accessible oil resources around the world, these players need to replace reserves and the current gyrations in price is relatively insignificant given the long-term trends.
However, if one did assume that oil was going to drop to below $50 and stay there for an extended period of time, than that would obviously have an impact on valuation. The flip side of that is that most producers need oil above $75 - $90 to justify drilling and the cure for low prices is low prices so I would be hard pressed to believe oil prices could be assumed to stay low for any length of time. In addition, with all of the accommodative monetary policies around the world, oil, like silver and gold, should trend higher in nominal terms.
Sorry for the long winded reply.
1.) I never said I owned it (although I might.)
2.) Why are you asking the question; i.e. why are you here?
3.) If I did own it, I'd own it for the yield and potential appreciation from the Utica monetization.