Chesapeake Pre Conference Note

 

The market abhors uncertainty. Look for CHK to address the current uncertainty tsunami with last Friday's press release and with its Analyst Days this coming

Capital Budget To Be Further Reigned In/ Not So For Production:

• CHK to cut another $1.5 B from its 2009 and 2010 capital spending plans
• On September 22 CHK had already cut $3.2 billion from announced planned spending.
• At first blush I'd guesstimate these new cuts would reduce YoY production growth to the 15 to 16% range from the current 18% 2009 growth target. However, CHK did not change volume guidance and there is the potential that fewer dollars spent in more prolific regions will mute the downward impact on production growth.

Asset Sales: Still looking for $2.5 to $3.0 billion. This is a buyers market so I would not be surprsied to see this come in at the low end of the range. CHK says it continues to make progress in monetizing a 25% stake in its Marcellus position (BP again?), in three other properties (undisclosed) which ones but you can pretty safely assume they are not Barnett, Fayetteville or Haynesville and from a fourth VPP (volumetric production payment.

• Use of proceeds likely to be faster than planned deleveraging
• Alternatively they could (and mentioned in the press release) a buyback. Before last week I would have said I really doubt that's a legitimate option. With the stock in the mid teens I'm not so sure.

Sneaky Sneaky With The Revolver. CHK announced they exhausted their revolver at the end of third quarter as the financial crisis loomed and access to short term financing dried up. This resulted in them buying T-bills with the proceeds and having $1.5 billion in cash equivalents on the balance sheet at quarter end. 35 of 26 lenders fully funded their obligation to the revolved with the holdout being Lehman who did not come up with their share ($11mm) for obvious reasons.

4Q - Capital Spending Cuts Underway...Company Sees Excess Cash Generation If The Monetizations Occur. If all goes accourding to plan (famous last words) CHK sees excess cash flow in the 4Q08 period of $1.5 to $2.0. That also assumes the knockouts on CHK's 4Q gas hedges are not triggered (see below).

Debt Covenants Intact: EBITDA and Debt to Total Cap ratios equal to or improved from end of 2Q08 to end of 3Q08. There have been rumors they are in default on their debt covenants. They are not at present and this will only occur if the knockouts in their gas swaps are triggered (again, see below).

Aubrey's Firesale. CEO Aubrey McClindon was forced to sell "substantially all" of his holdings in CHK last week.

• At last count Aubrey held 1.9 million shares down from the 32.5 mm he had before the meltdown started; he has been the largest shareholder of the stock for the last 3 years
• Impact on the stock going forward: none. Maybe a little credibility issue going forward before he starts buying again, however I would expect him to resume making purchases ASAP (with the emphasis on possible which remains unknown).
• No mention has been made of his working interest participation: he generates substantial monthly cash flow from his minority stake in a majority of CHK's wells drilled to date.
• How could he have let this happen? Gotten several of those type emails and I think its a pointless question but would point out that the combination of variables that led to his "forced sale" were unique to say the least, and Aubrey is a risk taker. He runs his company with a much more conservative and if you want more on this topic you really should talk to my wife.
• I'd note also that while Aubrey was punting shares on Friday from $26 to $12 one of his executives added about 10,000 shares towards the low end of the range...clearly not thinking, "oh crap, we're out of business!"
  
  

Morgan Stanley...The Next Big Fear. Counterparty risk to Morgan Stanley who is teetering on the brink of oblivion. CHK's hedge position is said to be skewed to them but in weeks past the worry was Lehman which turned out to be rounding error. Not saying Morgan Stanley will be that small but the fate of Morgan is not yet sealed either.

Knockout Swaps: The knockout swap is like a put option for the counterparty to the swap. The agreement is structured such that if the price of gas falls below the knockout price on the last day of the month during the period in question then the swap is nullified. I've included a table of knockout prices and the volumes subject to these prices below.

Stupid Quote of the Month Watch: Courtesy of Bloomberg ~ Goodof of Loomis Sayles said Chesapeake hasn't been forthcoming enough about its finances. ``Chesapeake is the least transparent of all the exploration and production companies,'' Goodof said. ``They tell you a lot about their oil and gas successes but not a lot about the goat pasture land on the balance sheet and the financial side of their business.'' Goodof called the releases ``almost impossible to understand without a CPA.'' ZComments:

• The debt and hedge schedules are in each 10Q,
  
  
• The swaps, collars, calls and yes, even the knockout swaps are in the 10Q's as well,
  
  
• (CHK) provides 4 quarterly estimates of reserves vs the typical E&P's annual reserve estimates,
  
  
• Goodof is often quotes as helping to manage $25 billion in assets at Loomis so I guess he can't be trouble to get a CPA or a CFA.
  
  

Reserves: 3Q08 reserves listed at 12.1 Tcfe. Put a firesale price on those of $2/ Mcfe and you have a value for the firm's proved reserves of $24.2 billion vs its current enterprise value of $24 billion. This attributes no value to the unproved risked reserves of 60 Tcfe CHK thinks they have in their current portfolio. That's ridiculous. We'll get more color on reserves later this week.

Haynesville Update: (No one will care but these are my notes ya know)

• 700,000 gross acres: 480,000 net acres (excluding 120,000 net in  JV with (PXP)
• Production at 65 MMcfepd gross, 50 net, from 16 producers
• Last 10 have IP'd north of 10 MMcfepd.
• 14 rigs here now, anticipate 25 average for 2009.
• Confidence is bolstered in the average EUR of 6.5 Bcfe per well,
• Reserves in play estimated to be 14 Tcfe risked
• No cost data, surely get that later this week along with a lot of flavor for the current inflationary (defaltionary I suspect) service cost environment.

 

Two Day Investor and Analyst Meeting: (available via webcast)

• Wednesday: 2:30 to 5:45 EST
  
  
• Thursday: 8:30 am to 1 pm EST