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GirlsUnder30 (32.47)

The pending doom at Chesapeake



July 12, 2012 – Comments (2) | RELATED TICKERS: CHK , CHKR

I am going to become known as the stomach turner here if all I do is rant negatively about stocks that everybody loves but I really think it would be worse if I just said nothing. My last alert was about Westport and todays heartburn comes in the form of CHK and CHKR. The latter is currently a 5 star stock and if you consider the property holdings alone it is deserved but there are other things at play here. The first and foremost problem is the tangible control of CHK proper over the trust. Yes, they are separate companies but not really and the ambiguity of the relationship between CHK and CHKR is disconcerting to me. Here is why:

CHK, in its quest to grow quickly, contracted and made hundreds of convenants for properties, many of which were not executed because the money ran out. Aubrey had an unfortunate turn which prevented him from saving the day with his own personal funds so the only thing left to do was pick and choose the best values and abandon the rest. This is both commendable and unsettling. How many CEOs would make this uncomfortable but pragmatic decision as quickly as Aubrey? How many CEOs would put their own capital at risk to execute a plan? Gotta give A.M. props on this but here is the dark side; all the jilted property owners are coming for their pound of flesh. The trickle has already started in Texas but it is likely to increase. The other issue here is the personal character of the man at the helm. Aubrey is in so many ways like Ahab persuing the whale. He has the vision and ability to succeed but the elements of vengeance and bravado will ultimately taint his strategy and raise the risk to uncomfortable levels for me.

CHKR has a really fat historical dividend but from where will they pay it? The promised dividend is roughly 5X the earnings. Theoretically, this could be accomplished by selling some of the properties in the trust but that would be a backtrack of Aubrey's plan and the profit will be smaller today than later when gas becomes a more established energy alternative. The other option of putting those properties online to produce is also unfavorable with the current market conditions for gas and it will very likely require money that just isn''t there. So, will more debt be taken on? Will more stock be issued? Will properties be sold at distressed levels? Pick your poison. I believe the dividend will not be announced anytime soon and that will keep this stock from climbing.

The competitve factor is ultimately the crushing blow here. The other gas producers like Ultra Petroleum have the means to add additional pressure which would all but crush CHK and CHKR in this vulnerable state. Whether or not they will do it is another matter but they certainly have the opening for the knockout. It is for these reasons that I believe CHK and CHKR are not feasable at these valuations. I am rooting for Aubrey because he really is America personified but I am too scared to take this ride with him.

2 Comments – Post Your Own

#1) On October 22, 2013 at 5:47 PM, chk999 (99.96) wrote:

CHK is up almost 50% from when you made this blog post.

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#2) On October 22, 2013 at 9:51 PM, GirlsUnder30 (32.47) wrote:

Yeah, but CHKR is down. I still think we'll see CHK's price drop again below $20 but for now, I have to eat this one.

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