Mikaila Adams, Associate Editor, OGFJ
Like many in the industry, Chesapeake Energy Corp. has found itself in a sea of financial woes. An aggressive drilling program warranted just months ago left the company over-leveraged and in danger of sinking.
In recent months, no stone has been left unturned in the company’s quest to right itself in these turbulent times. For the most part, the strategy seems to be working.
The apparent bottom came shortly after Chesapeake’s November 26 filing with the SEC regarding the issuance of additional shares brought forth fears of liquidity problems and share dilution. After the announcement, shares fell more than 14% to $10.14 on the NYSE. They continued to fall thereafter, ultimately hitting a five-year low of $9.84, down a staggering 86.7% from its July ‘08 peak of $74.
Then, in an early December media briefing by the company, Chesapeake CEO Aubrey McClendon noted that the move was a “mistake” and that the intent was misunderstood by investors.
“We underestimated how the market would assess the purpose, implication, timing and magnitude of our filings. Our intent was to create broad financial flexibility for an uncertain economic and commodity market environment over the next few quarters,” said McClendon.
The plan now is to terminate the agreements made with the three securities firms, abort plans to issue shares under the equity distribution program described in the November 26 prospectus supplement, and reduce the number of common shares to be registered from 50 million to 25 million.
After the call, Chesapeake Energy shares gained 82 cents, or 5.8%, to $14.88 in midday trading. A few days later, on December 10, Chesapeake stock was up again to $17.83.
The aforementioned media briefing served to reassure investors. Management showcased the company’s stronghold, citing the $1.5B in available cash, along with the $2B to $2.5B anticipated by year-end, and ultimately leading to an expected cash balance of $4B by year-end 2010 through asset monetization.
The company has proven it can do so. “So far this year, we have received approximately $11.7 billion in cash and carried working interests through the sale of two VPPs, the creation of three joint ventures and the sale of our Arkoma Woodford Shale assets. Our cost basis in those assets was approximately $3.0 billion, creating a gain of approximately $8.7 billion,” said McClendon.
Further, the company has hedged 76% of production at $8.20 in 2009 and 50% of production at $9.50 in 2010.
The media briefing also served to announce, for the fourth time since September, a cut in the company’s drilling budget. From the budget presented in its November 3, 2008 Outlook, the company has decreased its drilling capital expenditure budget for 2009 and 2010 by a combined $2.9 billion, or 31%, and has also reduced its leasehold and producing property acquisition budget for 2009 and 2010 by a combined $2.2 billion, or 78%.
In total, since July 31, 2008, Chesapeake has reduced its planned 2009 and 2010 drilling, leasehold, and producing property acquisition budget by approximately $9.8 billion, or 58%, to approximately $7.2 billion.
The company is now utilizing approximately 130 operated rigs, down from a peak of 158 operated rigs in August 2008, and plans to further reduce its operated rig count to 110 to 115 rigs early in the 2009 first quarter. Chesapeake’s costs in approximately 50% of these rigs will be fully or partially paid for by its third-party joint venture partners.
Chesapeake anticipates its drilling carries will save the company approximately $1.2 billion of capital expenditures in 2009 and approximately $1.1 billion in 2010.
At presstime, the company had just closed its fourth volumetric production payment transaction (VPP). The $412 million sale of certain of its operated, long-lived producing assets in the Anadarko and Arkoma Basins closed on December 31 and will be treated as a sale for accounting purposes. The company’s proved reserves will be reduced accordingly. Through the VPP, Chesapeake conveyed a royalty interest to investors associated with Argonaut Private Equity. The purchase was financed by GS Loan Partners, an affiliate of The Goldman Sachs Group Inc.
The assets include proved reserves of roughly 98 bcfe and current net production of nearly 60 MMcfe per day for proceeds of $4.20 per mcfe. Chesapeake retained drilling rights on the properties below currently producing intervals. Jefferies Randall & Dewey advised Chesapeake on the transaction.
A fifth VPP for a portion of its assets in South Texas is currently being marketed. Management believes it can fetch another $450 million by the end of 1Q09.
It seems as though Chesapeake is doing all the right things in terms of balancing financials and increasing liquidity. Despite major setbacks and losses, the company remains buoyant. All that’s left for management to do is stick to its word. Credibility issues could only cause more problems.
