Wrap – Week Ended 1/16/09 (in progress)

 

In progress, comments forthcoming. Market will ne closed for Dr. Martin Luther King day on Monday. See a message from JR at the bottom of the post.

In the wrap:

1. Wrap table
2. Market commentary - tba
3. Holdings Watch - tba
4. JR's ad
5. View mailbag

 

Wrap Comments & Holdings Watch Comments forthcoming.

tba

The following is notice from one of our subscribers. Take a look at the website:

• The BlackStorm Production System (BSPS) is a one-piece, integrated production string w/ ESP that replaces rods, tubing and pumpjack.
• Since all of the system is either reinforced thermoplastic or stainless steel, it is totally corrosion proof.
• Manufactured by Parker-Hannifin Corp..
• The BSPS moves fluid at less than 1/2 the cost of a beam pump
• The BSPS is one man deployable and servicable, no workover rig required, depths to 1,100' currently deeper depth system under development by Parker-Hannifin Corp..
• It takes under 20 minutes for one man to drive up to a non-equipped well, do the installation and drive away with the well pumping.
• There is no maintenance issue that one man can't handle with the tools that fit in a tackle box in less than 1 hour.
• We have run the SAME string into over 200 wellbores with no wear issues whatsoever.

1. Consensus does show EPS of $2.50, pretty quick move from flattish year over year read not long ago. As you know, I don't use EPS for E&P companies as it really doesn't tell you that much. (27 analysts submitting here)
2. CFPS goes from $8.89 for '08 to $7.32 for 2009, a much more palatable drop and that makes sense given the big % drop in gas prices for the unhedged portion of their production. That's based on 21 analysts.
3. Since they have a good bit of debt on the balance sheet, I prefer EBIDTA as compared to their TEV. Where as Cash flow is essentially net income + deferred taxes + depreciation + non cash charges EBITDA goes the extra step of removing interest and current taxes from the equation. Since E&Ps have different debt loads and different account methods for looking at exploration (full cost or successful efforts) this puts everyone on an equal footing. I generally use CFPS in a pinch and then if the debt levels are widely divergent go on to look at TEV / EBITDA. That being said, 2008 EBITDA for CHK is $5,450 mm and 2009 will dip slightly to $5,403mm (this is from avg of 14 analysts). The delta on the CFPS to EBITDA numbers in terms of the smaller decline is the share count which is not in EBITDA but is included in TEV/EBITDA.

   So we have:

   CHK at 15.26 / EPS of $2.50 gets a  6.1x PE (not expensive by most common measures but not all that useful)

   CFPS of $7.32 yields a forward P/CF of 2.1x which is stunningly cheap from a historical perspective but these are stunning times. Moreover, the higher the reserve life, the higher the P/CF multiple (at least normally). Despite being the #1 or #2 gas producer in the U.S. they still have an extremely long reserve life on 1P reserves (a little north of 15 years), let alone 2P or 3P reserves so the markets are truely broken right now.

   TEV/EBITDA - The Street is a little high here as CHK is only looking for $5.2 billion but CHK has been known to bag the numbers from time to time and who could blame them for setting the bar pretty low for themselves right now. Anyway, say Aubrey just can't pass up some new shale play or adding to another one and drops another 50 mm shares during the year (call it 650 share count for the whole year). Add the debt of 12 billion and you have a TEV of about $22 B. That puts '09 TEV/EBITDDA at 4.1x which is pretty cheap (historically speaking) and in line with their large cap peers.

   Bottom line, Baron's had it right this weekend when they called this a Jim Morrison market: "the future's uncertain and the end is always near"

   I may put some form of this in the wrap post as people ask me about earnings vs CFPS and EBITDA all the time. If I do I may add a chart or table to expand a bit.