I think once more clarity gets out on a few issues, bottom might be in. From listening to the call, most analysts were complimentary. Some analysts seemed confused on a few things and mostly surround leverage:
1. Aubrey indicated a note was put out by an analyst re preferred stock incorrectly indicating it could be convertible to common...it's 7% perpetual pref...no common convert.
2. Debt up in quarter, but will come down at 12/31 once the Utica transactions are consummated. 12/31 balance sheet will be "a lot different" from 9/30 balance sheet.
3. Funding gap for '13...Aubrey indicating that it's "not that hard" to close. Land grab mostly completed. CHK's leverage also misunderstood as they have $17B in Non-E&P assets, but debt is not imputed to those assets, but to the E&P segment.
4. JP Morgan led discussion on the belief their capital spend was $6.5B + $.8B when in fact the .8B is part of and not in addition to the $6.5B. Problem is that CHK created a separate category for the drilling and completion cost schedule to keep certain HBP spend out of the "full cost" pool for now (the costs are from non-proven locations)...w/ input from outside accountants. Some confusion seem to be there in attempting to get an apples to apples comparison. Additionally, higher spending in 3Q created the appearance they they will be above their full year spending guidance.
5. Analyst infer that closing out hedges was a sign of a need for cash. Aubrey indicating they will see a change in forward curve soon as resources continue to move towards liquids.
Seems to be a little mistrust for Aubrey, so I think some of these folks are in the "show me" stage.
Anyone else care to help here?
wags9999, I could not post everything due to Yahoo posting rules. The article is quite good, but I recommend strongly one should read the comments at the bottom of the article. There are some good ones with replies from the author.
wags9999, I read this seeking alpha article, and it's a good one on CHK's business. The comments are very good, and should be read. This is one of them:
"There is some history behind the analysts negative behavior. CEO McClendon bet the farm (and most of his personal fortune) on natural gas a few years ago. When the natural gas prices dropped, CHK (and his personal fortune) got hurt badly. In fact that behavior accounts for a lot of CHK's current debt.
Analysts are worried the same thing could happen again. However, their cynicism is unwarranted in my view for the following reasons: 1) With the emerging economies worldwide, it is unlikely the bottom will drop out of oil prices.
2) CHK is scooping up huge prolific oil shale (and gas) fields early. It is proving the assets with minor development. Then it is selling a portion (usually 25%-35%) to another large company to essentially pay for all of the costs it incurred in the purchase and the early development. In this way it is getting large interests in prolific oil fields (and gas fields) for free.
3) CHK is paying off its debt slowly from its increasing profits.
4) CHK is emphasizing oil development activities over gas. Over the next few years, CHK will show increasing profits from oil.
5) Eventually natural gas prices will start to go up in the US. The emerging economies need fuel to grow. Natural gas is a cheap, clean fuel. More and more will try to take advantage of this. This means the natural gas prices will start to go up, especially as LNG emerges. When natural gas prices do go up, CHK will add huge natural gas profits to what should be huge oil profits. It seems likely at that point to emerge as one of the biggest and best energy companies in the world."
Look at the value of the enterprise:
They are pricing the 13 million acres at $11.39B TOTAL. That is the analogy of a Lexus 460 hybrid brand new selling for less than 1 dollar US of value.
The company is worth well north of 240B when you look at the details. It trades at 1/12 of this today.
No one believes it, either. It is being treated like swamp land and Disney at their beginning.
In two years when no major company in the U.S. is drilling natural gas wells unless they have contracts to sell production for more than $6mcf, no new wells will be drilled in 2012.
I would assume that prices will go to $5 by end of 2012 and $6 by end of 2013, $7 by end of 2014. Then in 2015 the gas producers will be selling to buyers in Japan, China and Europe where they currently pay $10mcf. What will the price be in 4-5 years? Much higher.
CHK's share price will start to move when they are producing more oil. That is happening and will be a material amount of cash flow in 24 months.
I do not know when the share price will take off but it will happen. We might have to wait for a couple of years. By then, oil and natural gas liquids will look something like EOG's production in 2011.
What is the market missing. Chk spent aprox 2 billion to acquire it's Utica position. It is selling 25 percent of half of it's acreage in Utica for over 3 billion. Over the last year or two it was money out. Starting in q4 it will be money in with the first payment of .625 billion and then production carries of about 100 million more or less per month to 2014. this more than covers the Utica acquisition cost and leaves the remaining 90 percent interest owned by CHK. Even though the earnings were stellar to me I am an investor not a trader of CHK because I view the company as a real estate play. All these acquisition moves and sales to other energy interests have been hidden on the balance sheet by manipulating downward the property account by adjusting basis down with each profitable sale. No income is shown and the cash entry is offset by reducing property. Therefore you get a balance sheet that has no reality to real value. Compounding further this undervaluation is accumulating amortization. just think how silly it is to devalue in the early stages Utica value per acre on the books when you extract liquids. In fact the acreage is worth more even though some amount of liquids has been depleted. I would argue that most of the amoritization on the books is tax based not reality based. So look at current market cap of 18 billion or so and then look at current shareholder equity of 16 billion. add back most of the amortization and then factor in another 40 billion in understated market value and then you get the true value of CHK, the real estate play which will someday be sold because of it's property value. That is called an investment.
Note this was reported by Bloomberg"
"* JPMorgan analyst Joseph Allman wrote last night concerned w/
company spending; CHK spent $827m above JPM’s model for 3Q"
* Allman sees 4Q to year-end 2012 funding gap ~$9.8b after
Utica deals; had prev. seen 2H to year-end 2012 gap ~$8.5b prior to Utica transactions
* JPM rates CHK neutral; downgraded shrs on 10/18
As noted in the call, JP Morgan was incorrect as the $800MM was part of and not in addition to the $6.5B spend. They misinterpreted the numbers...net down the $800MM and now CHK's spend appears to be in line with their so called "model". Ya think a corrective statement is due from them on Monday?
Morgan seemed to have a little ax to grind going into the call. However, CHK also needs to add some clarity around their spend...other E&P's focus more on it. It is creating a good deal of risk around the stock and obviously the analyst community is running with their own assumptions.
Additionally, the fact that that another analyst put out a note getting the preferred issue incorrect is also somewhat reckless. CHK needs a little more spoon feeding to a few of these analysts in order to ensure they are getting it right.
I will concede that the unwinding of the hedges is a little concerning. I think CHK made a strong case two years ago that gas rig counts would be coming down hard and we would see greater supply balance...never happened..they obviously also contributed to the problem. Now, storage is still high and although CHK's nat gas rig counts are coming down as they move to liquids, the BH reports still confirm there is a lot of gas drilling taking place. XOM/XTO is also still active. I would love to see the their metrics that support this forecast.
Furthermore, what would go a long way for CHK would be a restructuring of Aubrey's Founders Well Participation Rights. Related profits should be returned in CHK stock. He needs a larger share of CHK ownership. His 2.5% interest in wells is making him a great deal of money every year. Unfortunately, the CHK stock has not faired as well in recent years. He's getting a cash on cash return while we are taking CHK paper risk. We need to even the playing field.
I don't know how CHK will perform but the guy (Allman) from JPM is a total moron who must be in on the take with short biased hedge funds (or is just totally brain dead). I recall he did a total dud report on ATPG a year or so ago and had to correct himself after he drove the stock into the ground unnecessarily.
"""Furthermore, what would go a long way for CHK would be a restructuring of Aubrey's Founders Well Participation Rights. Related profits should be returned in CHK stock. He needs a larger share of CHK ownership. His 2.5% interest in wells is making him a great deal of money every year.""""
The agreement as I understand it is that they will have the professional consulting firms come in and advise the board on his future compensation.
Since there is no person in any of these public companies with a revenue sharing deal like this you have to expect this to be something that will change.
Imagine if Steve Jobs had had a participation contract like this and got 2.5% off the top for helping with investment costs and design. As I said he is the Lone Ranger.
Don't get me wrong look for a big buyout or something on this as I think his contract on the program has about 3-4 years left yet.
The CEO stated the service company is worth $17b/$23per share. For a CEO to assign enterprise value as a market value is a bit amateurish. Also the CEO's wealth is alligned much more to production, where he owns 2% of every well. Forbes estimated that value at over $500M, whereas his stake in the shares is $85M.
Didn't he lock in a nice profit by buying back the hedges?
Should natgas prices now skyrocket wouldn't he be able to make even more profit by redoing them after such a rise in price?
I would think he was preparing for such a price move and think this is a good thing.
What am I missing?
I believe Aubrey stated in the Conference call that the value of the Utica interests alone total $28 per share. My opinion of the JV move was brilliant.
I see no reason for the drop in price and added to my position. Long term, it's a great entry point.
$28 a share for the Utica----and other companies owned and equipment worth 20-25 dollars a share so those 2 together is over $50 a share plus all there other acreage/production total worth right now is $70-100 dollars a share in my opinion.
He's a Wildcatter who knows how to use leverage to build a company. He's very good at what he does and his model isn't that hard to understand if you step back and look at it.
I even got the subtle message that CHK is responsible for a vast percentage of the gas on the market. They are playing the OPEC game of cutting back on production resulting in an increase in NG going forward. Once supply/demand levels out and the price increases, they will resume production. In the meantime, they have the liquids to compensate. Utica is just now starting to ramp up due to infrastructure issues that seem to have been mostly resolved.
Some of you guys need to read the conference call transcript.
Would you believe that this deal left us down based on Aubrey's promise.
He indicated a 33% partner and bragged about it worth $15,000 an acre.
Well he got the $15G but he only got it on about 140,000 acres INSTEAD of 500,000 as he promised/portrayed.
The second part of this transaction is nothing more than him borrowing more money against a portion of the Utica.
Imo, Aubrey made a big mistake with his presentation of this....
The over all qtr results are very good.
The capital budget/debt scenario has always been a problem. So its nothing new to me.
They have assets to monitize.
They have to move asap to a company leveraged on wet/oil & gas liquids so they need to spend on CAPX.
2013 is that transition year. UTICA a defining value play for the company.
I for one will be adding to my position under $26. I view the stock as cheap at that price.
Took the words right out of my mouth. Im buying more in 24-25 area if it gets there. Macro events will control the market for a while. In normal times CHK would be up 10 points for the UTICA play. In 3-5 yrs CHK should be 30% higher.
Until Aubry "plays the game" the way the analysts want him to this stock will go nowhere.
I have been a stock holder for about 10 years and am now about to give up with a substantial loss despite some good trading profits.
The analysts don't trust him. And, he makes them analyze the company differently from the other companies they follow.
Their models don't fit his management style and stockholders suffer.
The only hope is a takeover and I just don't see that happening because of potential antitrust issues.
This is one frustrated stockholder.
if you owned CHK for 10 years, you are rich and not at a huge loss. Are you a bashers who thinks we will not notice the inconsistency of your post.
Takeover is not likely due to huge size of CHK and all the JV's which would make the legal conversion too complicated for many potential buyers.
dadofbb, if you have had CHK for 10 years, you are up a lot -- about 400% to 600%. Interesting all your other posts except the one below are for tiny, speculative, very high risk stocks. The post you did here on the CHK board is your first. That is very interesting stuff.