Economic meltdown and local energy companies

[wsucougz]

As of today, both Chesapeake and Sandridge have lost about 75% of their value on the year and Devon has lost about 55%

Since our economy is still very tied to energy, it's not hard to imagine that we might start feeling this in the very near future. Worst case scenarios aside, it appears for example that someone could easily come in and acquire a majority stake in Sandridge for around $850 million and relocate them. Other scenarios include layoffs, planned developments being postponed or taken off the table, etc. etc all the way up to the absolute worst.

As there doesn't appear to be much in the way of economic good news on the horizon, things appear a bit precarious, particularly if the deflation of commodity prices keeps up. Maybe someone on the inside can lend some perspective as to how these companies are looking at it, what sort of hedges might be in place over the next few years, etc. etc.

[wsucougz]

Thx, moderator.

[Midtowner]

How easily these companies could be acquired depends on a lot of factors. As far as saying $850M (or anything) is "the price" is very speculative. You don't know what defensive measures they've employed as to a takeover, and I think considering the economy, as to any hostile takeover goes, any of these companies could easily make the argument that their stock is currently very undervalued.

The good news (if you can call it that) is that most everyone is hurting. Chesapeake claims to be sitting on a mountain of cash, Devon is for sure. Considering the finances of these companies, and especially Devon, I'd expect them to be an aquiror before an aquiree.

On a side note, I lost pretty much everything I had in Quest, down 90% off of their high this year (and that's where I bought in)...

[Kerry]

Don't worry - no one has $850 million right now. They sure can't borrow it from someone. You would be executed if you went into finance institution and ask for a loan to buy some stock.

[wsucougz]

Don't worry - no one has $850 million right now. They sure can't borrow it from someone. You would be executed if you went into finance institution and ask for a loan to buy some stock.

A lot of energy firms have cash.

[Kerry]

A lot of energy firms have cash.

Yes they do and my guess is they want to hold on to it. Why use it to buy the stock of a company that is going down and whose main product is also declining in value daily. Now, if CHK wants to buy Ford and switch all of the cars to CNG then you might have something. For what T. Boone Pickens has spent on his energy plan he could have done that.

[wsucougz]

Yes they do and my guess is they want to hold on to it. Why use it to buy the stock of a company that is going down and whose main product is also declining in value daily. Now, if CHK wants to buy Ford and switch all of the cars to CNG then you might have something. For what T. Boone Pickens has spent on his energy plan he could have done that.

Well, it isn't hard to imagine that someone might see some value in a company like Sandridge at 1.5 billion, or about 12% of its capitalization of about 3 months ago. Whether or not they have the ability to use a poison pill is another thing.

[Kerry]

If you are looking for stock bargins then there is no doubt that you can find them. GM is trading at $4.50 per share and Ford is down to around $2. The problem is that every company is down huge and no one has the money to spend.

[wsucougz]

If you are looking for stock bargins then there is no doubt that you can find them. GM is trading at $4.50 per share and Ford is down to around $2. The problem is that every company is down huge and no one has the money to spend.

Apparently the statement that no one has the money to spend isn't really true because in the past 2 weeks Warren Buffett has invested heavily in Goldman and GE, Wells Fargo is acquiring Wachovia, etc. etc.(google news, "acquisition" - there are many). Someone has money and when there's blood in the water, such as now, they will buy at a discount.

Now, the shareholders would have the final say in a non-hostile merger, which would protect against a buyout that was too low. However, what if one of our more debt-laden local companies finds that they can't afford to service their loans? I'm not sure who that would be as I don't keep track of it, but such a scenario could spur a buyout at deep discount.

buyout aside, which is probably the least likely scenario anyway, the industry could suffer in many ways if commodity prices continue to drop.

and why would I buy GM or Ford? So they can reorganize and my stock would be worth 0? Was Wamu a bargain at $2?

[markar]

Not good for Aubrey but maybe CHK will start to come back now. It was getting ridiculously low this morning. I was hoping this was a joke of some kind when I heard it but I guess it wasn't. Maybe there's more to it.

Chesapeake Energy Corporation Discloses CEO's Involuntary Sale of Common Stock: Financial News - Yahoo! Finance


Chesapeake Energy Corporation Discloses CEO's Involuntary Sale of Common Stock
Friday October 10, 4:56 pm ET

OKLAHOMA CITY--(BUSINESS WIRE)--Chesapeake Energy Corporation (NYSE:CHK - News) today disclosed that its Chief Executive Officer, Aubrey K. McClendon, involuntarily sold substantially all of his shares of Chesapeake common stock over the past three days in order to meet margin loan calls.

[wsucougz]

Not good for Aubrey but maybe CHK will start to come back now. It was getting ridiculously low this morning. I was hoping this was a joke of some kind when I heard it but I guess it wasn't. Maybe there's more to it.

Chesapeake Energy Corporation Discloses CEO's Involuntary Sale of Common Stock: Financial News - Yahoo! Finance


Chesapeake Energy Corporation Discloses CEO's Involuntary Sale of Common Stock
Friday October 10, 4:56 pm ET

OKLAHOMA CITY--(BUSINESS WIRE)--Chesapeake Energy Corporation (NYSE:CHK - News) today disclosed that its Chief Executive Officer, Aubrey K. McClendon, involuntarily sold substantially all of his shares of Chesapeake common stock over the past three days in order to meet margin loan calls.

Holy. Crap.

[Steve]

Story should be hitting Oklahoma News, Weather, Business, Sports, Entertainment, Travel | NewsOK.com shortly.

[Platemaker]

Chesapeake Energy Corporation Discloses CEO's Involuntary Sale of Common Stock

Chesapeake Energy Corporation (NYSE:CHK) today disclosed that its Chief Executive Officer, Aubrey K. McClendon, involuntarily sold substantially all of his shares of Chesapeake common stock over the past three days in order to meet margin loan calls.

Management Comments

Mr. McClendon commented, "I am very disappointed to have been required to sell substantially all of my shares of Chesapeake. These involuntary and unexpected sales were precipitated by the extraordinary circumstances of the worldwide financial crisis. In no way do these sales reflect my view of the company’s financial position or my view of Chesapeake’s future performance potential. I have been the company’s largest individual shareholder for the past three years and frequently purchased additional shares of stock on margin as an expression of my complete confidence in the value of the company’s strategy and assets. My confidence in Chesapeake remains undiminished, and I look forward to rebuilding my ownership position in the company in the months and years ahead.”
Chesapeake Energy Corporation is the largest producer of natural gas in the U.S. Headquartered in Oklahoma City, the company's operations are focused on exploratory and developmental drilling and corporate and property acquisitions in the Fort Worth Barnett Shale, Haynesville Shale, Fayetteville Shale, Anadarko Basin, Arkoma Basin, Appalachian Basin, Permian Basin, Delaware Basin, South Texas, Texas Gulf Coast and Ark-La-Tex regions of the United States. Further information is available at Home | Chesapeake - Doing the Nation a World of Good.



YIKES!!!

[Steve]

Story posted

[jbrown84]

Can someone who knows this stuff decipher this for me?

[wsucougz]

This is a basic understanding:

He bought shares using margin, which is essentially borrowed money. The shares dropped significantly below what he bought them on margin for and he was forced to come up with cash to cover the margin. He didn't have the cash so he had to liquidate his other holdings to cover the margin call.

[bretthexum]

Wow, that's bad news. He had a TON of stock.

[Pete]

He had to sell almost all 33 MILLION shares of his CHK stock.

When the stock was at $76, that was over $2.5 billion; which is almost his entire net worth.

It closed at $16 and he may have had to sell it at a lower point; it was down below $12 for a while. At $16, that would net $.5 billion but who knows how much he borrowed against that.

[adaniel]

I think you're putting too much stock (no pun intended) into energy companies stock prices. What your seeing right now is a total panic of investors who are pulling out all of their money from the market, not really caring whether if it was invested in a company that was doing well. The same thing is happening in the commodities market, which has caused oil and gas prices to dive. I would be more concerned with the later. If prices for oil and gas continue to go down (I believe they're close to bottom) then get worried Even still low prices hurt Chesapeake, Devon, Sandridge, Questar, and other OKC companies just as much as Exxon and Shell. So even then, I doubt any major takeovers are going to happen anytime soon in that industry.

Chesapeake may be a special case. I don't think they're in trouble but they're in a worse spot than most energy firms because they have financed their expansion through the issuance of stock where most companies have reinvested their profits. High gas prices will probably prop them up for now but the days of Chesapeake growing 25-30% annually are probably over.

[SouthsideSooner]

I wonder if this news will put even more downward pressure on the stock?

[jbrown84]

You would think.

[Pete]

McClendon owned about 7% of all outstanding shares, so dumping that amount all at once certainly hurt the stock price -- especially with the existing panic.

I'm sure the other shareholders are very unhappy.

Hopefully Aubrey can lead them back but it seems the same type of high-leverage strategies were used corporately as well.

[wsucougz]

So where's all this cash that Aubrey says Chesapeake has on hand?

CHK: Balance Sheet for CHESAPEAKE ENERGY CP - Yahoo! Finance

The balance sheet shows $1 million in cash on hand as of the latest quarter. Most of their money appears tied up in illiquid assets - $33 billion in property, plant and equipment(how much is the property worth now with NG futures being halved?) - they also hold $13 billion in long term debt.

Those debt payments could get nasty in a hurry, particularly if the rate is tied to Libor as it is for so many other companies.

I'm no economist, but it doesn't appear Chesapeake has much of a cushion afterall.

[OKCTalker]

This is from today's WSJ regarding Chesapeake's cash position (punctuation, linefeeds and paragraphs are as published):

Chesapeake co-founder and chief executive Aubrey McClendon said his company expects to end the year with $5 billion to $6 billion in cash -- enough to keep growing without tapping the capital markets.

The company had no cash at the end of the second quarter.

"We can continue to be the number one driller in America, the number one leaser in America ... because we're a big company, we generate a lot of cash," Mr. McClendon said.

[OKCTalker]

I'd like to know if this is a "big deal," or just a "deal." I'd like to see people discussing CHK fundamentals on employment changes and completion of campus construction before talking about ripple effects with OKC philanthropy, Western Avenue/NH real estate, OKC Thunder, etc. I'm confident that any talented, surplus employees will be picked up by DVN. Their off-campus acquisitions appear to have ceased, so there's no additional outflow there, but I'm concerned about several uncompleted campus buildings being left as they are (echoes of "see-through" buildings as booms turned to busts). I'm confident that their talented employees will be eventually picked up by DVN. Is this just an "Aubrey thing," or does CHK at $16.52 and gas at $6.54 portend quick, bad, deep news?