Chesapeake Energy Corp (CHK)

Has all the makings of another ENRON.

Quarter after quarter the company dilutes shareholders equity with new debt and new shares issuances.

For a company that constantly reports great earnings, thier cash flow statement is a disaster.

With the excpetion of Mr.McClendon, managment is dumping its shares. Mr. McClendons share purchases are the only catalyst this company has going for it. Were he not buying, this company would be trading in the 20's. The level at which he is buying raises suspicions.

A huge red flag was raised when Tom Ward left the company stating he wanted to focus on his charitable work. Within a year Mr Ward starts his own company, Sand Ridge Energy (SD) and takes it public. Why would Mr. Ward give up the lucrative post he had at Cheasapeake to go start another company? Sounds eerly similar to Rich Kinder leaving ENRON and starting KINDER MORGAN.

Given the huge disparity between earnings and the cash flow statement, the continued dilution of the shareholder, the poor cash position, the recent insider selling (except Mr Mclendon), and the mysterious departure of Tom Ward, I would avoid Cheasapeake. Too many red flags.

NatGas is bringing sexy back.

Regardless of who wins the White House (McCain,Clinton,Obama). The next President will likely pass some sort of carbon emissions tax. You may be wondering "what does this have to do with natgas?"

The USA has as much natgas as we have coal. With the new carbon taxes coal will become more expensive making the clean burning NatGas SEXY. (especially in electricity production). Green energy is still needs more work, nuclear takes 10-15 years to build and you have the "not in my backyard" issues, and coal is about to become a lot more expensive. With high oil prices it makes to produce natgas domestically instead of shipping it halfway around the world.

Bullish on SD (great leadership)
Bullish on CHK (hit the jackpot in Louisiana)
Bullish on KMP (have to transport it somehow. They also have an awesome CEO. Makes a salary of just $1 per year, the rest is paid in stock dividends. In essence if he doesn't make money for the shareholders he doesn't get paid. But, he is getting paid a lot recently. Shouldn't you?)

Chesapeake Energy is the third largest independent producer of natural gas in the United States. The company is also involved in producing crude oil and drilling activities, still about 92% of its 1.7 billion cubic feet equivalent per day production involves natural gas. It also has proven reserves of approximately 9 trillion cubic feet equivalent, with majority reserves based onshore, thus aiding the company to reduce the risk involved with international operations and import duty restrictions. Though Chesapeake’s major revenues involve sale and marketing of oil and natural gas, the Service operations revenue that consist of drilling and oilfield trucking operations creates a strong hedge for company’s regular natural gas business.

In 2006, natural gas averaged at about $6.73 per thousand cubic feet, as U.S natural gas consumption declined by 265 billion cubic feet, due to reduced heating demand during first two months of the year led by unusually warm weather. The price outlook in 2007 seems appealing for large natural gas players like Chesapeake, as gas consumption is expected to rise by about 900 billion cubic feet, guided by strong demand from residential sector for heating purpose and heightened industrial usage.

Chesapeake witnessed a strong 2006 as revenues were up by 57%, while net profits more than doubled as compared to previous year. This strong performance was led by realization of higher oil and natural gas prices, which was further backed by combination of production growth from drilling as well as increased capacity due to acquisitions. Looking ahead in 2007, the company is likely to continue the rising trend guided by its huge reserves, deep drilling expertise, and competitive advantage due to primarily domestic operations. The company also has an impeccable record of increasing production for 17 consecutive years and 22 consecutive quarters through number of acquisitions. Moreover with price outlook in 2007 looking very positive for the company, the further rise in production will act as major boost for Chesapeake, making it a strong investment.

Why I like Chesapeake Energy:
1) Price increases. For natural gas prices to remain as low as they have been, producers would have to continue to pump out gas at costs that exceed the price it can be sold at, not counting hedges already in place.
2) Write ups. Last quarter's write downs on the value of reserves turned an operating profit into an operating loss of $9 billion. For scale, the company's largest ever annual operating income was $3.4 billion in 2006. Yesterday's write down sets the stage for tomorrow's write up as natural gas prices move up.
4) Joint Ventures. The company has joint ventures where the partners are on the hook to pay $4 billion of drilling costs. The company gives up some gas for that, but gets that much more drilling done without having to worry about cash flow.
3) Hedges. The vast majority of 2009 production and about half of 2010 production is hedged to sell at more than double today's market rate.

Concerns:
1) Cash is near zero. Liquidity is provided almost exclusively by short-term derivative instruments, which were purchased for hedging. Volumetric production payment deals are likely to provide a quick boost for cash, but if they fail to come through, a dilutive offering may be in the wings. And, this is a company that has demonstrated a willingness to raise cash even right after saying they wouldn't.
2) Is the CEO thinking of shareholders? CEO McClendon gets paid a lot, but doesn't own a lot of shares. He used to, but he lost most of them to an October margin call, and his selling badly acerbated the stocks fall. The board has recently paid McClendon an obscenely large bonus and required him to invest it in the company's wells. The board claims that's aligning interests. Investments in the company's wells are not the same as investments in the company's equity. McClendon has used company money for personal interests, such as his NBA team and art collection.
3) Bought Board. The median annual compensation package for non-employee directors is $680 thousand. No wonder McClendon's eccentric expenditures are rubber stamped.

Valuation:
In the ground are 11.8 trillion cfe of proved reserves and 236 trillion cfe of unproved reserves of various quality. Giving the company credit for 30% of its unproved reserves yields a total of about 80 trillion cfe. Say the company can sell the gas for $1 more per thousand cfe than it costs to get the gas (including paying McClendon and everybody else). That would value the company at about $80 billion. Subtract $14 billion for debt, for a value of $66 billion. With 626 million shares outstanding, that's $105 per share. If I were more comfortable with management, I'd tack on a premium for their management of this resource and another boost for my rosy expectations for gas prices in the long run. But, Management is a concern, and my 30% credit for unproven reserves may be to high, so I'll just stick with $105 for now.

Natural gas is/will increase in importance as oil prices increase and access to LNG and Canadian Natureal gas decrease. CHK has large and growing reserves and has transitioned from a company focused on resource capture to resource explotation.

Trades at a steep discount to liquidation value based on the futures curve, and has a superior drilling inventory and management team.

CHK continues to add reserves at very attractive prices. The latest acquisition averaged 2.10 per
mcfe. It is located in the Barnett Shale Zone a very active natural gas field in the Fort Worth area. They should hold their finding and production cost to below 1.90 mcfe. This adds up to big profits in the future.

Macroeconomics favor Natural Gas Producers.

Oil production appears to be stalled (peaked?) at 85 million barrels per day. Huge new natural gas shale reservoirs are waiting to be exploited in the U.S. (the Barnett shale activity is so strong, the other big finds like the Fayetteville shale and Marcellus shale are still waiting for drilling rigs.) T.Boone Pickens is leading the charge for natural gas fueled transportation vehicles. The other alternatives such as fuel cells and electric batteries still have some major technological hurdles to overcome.

Chesapeake will have the macroeconomic tradewinds at their backs for many years to come!

Ugh... has to raise cash at exactly the wrong time! The CEO obviously can't manage his personal finances, so there's little surprise that he's mismanages his company's finances as well.

Massive dilution... shedding assets for pennies on the dollar... I feel for the existing shareholders.

If you are not adding to your energy basket in early 2009 at these levels then you are not one that likes to bargain shop. Being a strong buyer of energy now will pay off in spades once we get a reversal on the demand side.

CEO keeps buying many shares. Thinks company undervalued? Or planning buyout to take private? Either way, price rises!

Where do I start? Very competent management with the balls to use the market-gyrations to their advantage. That plus a valuation that doesn't seem to account for the enormous amount of unproven gas reserves this company is sitting on. "It's a deal, it's a steal, it's the deal of the f***ing century!" to quote one of my favourite movies.

Aubrey McClendon and Tom Ward (before he left) took Chesapeake from a $50,000 startup to a $14B company. While being one of the nicest guys you'll ever meet, Aubrey is completely in this thing for the long haul, completely sold on his belief in the company and one of the most aggressive guys you'll ever run into. Chesapeake is the largest driller in the United States and well on the way to becoming the top producer of natural gas.

One of the largest gas producers in the US. Recently completed a large acquisition programme of gas deposits and is now switching its energies to ramping up production. ROE > 20% since 2003. CHK's size and ability to make sensibly priced acquisitions gives it a moat.

Valuation is sensitive to future price of natural gas, currently @ $7, but CHK have hedged against this. Valuation ratios are low, historically and compared to industry averages. PEG 0.7. P/B 1.4. P/E 8.4.

Recently bought by a large number of investment 'gurus' at around $30. Mason Hawkins owns 29 million shares. Significant stock buying by the CEO, who now owns 27 million shares.

this stock did well when I first bought it, but has stopped increasing in value.

Solid company that is priced low given the warm winter of 2005/6. Expect a rebound in prices as excess NG surplus stocks dwindle and new CA regulations favoring non-coal-fired power plants take effect. If you are looking for socially responible but sound investment, CHK is a safer play than "alternative energy" stocks that are over-valued and lack consistent earnings.

Chesapeake has vast reserves and skilled management, and is very well hedged against gas price fluctuations. They also own many of their own drilling rigs, which insulates them against increases in service costs. And unlike many E&P companies, their assets are inland in the U.S., offering protection against hurricanes as well as adverse actions taken by foreign governments.

Do you know about the company or is this just your gut feeling? They have close to one billion from a secondary offering not on current balance sheet...have hegged most of there nat gas output in 07 plenty in 08 at $9 above current market price. Look at PE undervalued compared to peers... How much downside do you see here currently at around $30? CEO has bought hand over fist at levels a little below $30....

This natural gas company is great at hedging and aggressive at drilling. Natural gas is the clear winner for relatively clean production of electricity and should rapidly increase its presence in the Northeast heating market. Chk is all domestic and entirely onshore which limits liabilities