Economic meltdown and local energy companies

[wsucougz]

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.

Let's hope so. It sounds like they need to horde as much cash as possible.

[Pete]

This is from a message McClendon sent to all CHK employees today:

So, where does this all leave us as a company? Actually, despite a ridiculously low stock price, in excellent shape. We have over $1 bln of cash on hand and we are well hedged at prices significantly above current prices with counterparties that are generally among the strongest still standing. We will generate almost $6 billion in cash flow in 2009 (or about $10 per share) and about $6.7 bln in 2010 (or about $11 per share), plus we have asset sales planned in each of 2009 and 2010 of several billion more. In addition, we have several property sales and joint venture initiatives under way that should allow us to end the year with even greater liquidity than we now enjoy.

[wsucougz]

This is from a message McClendon sent to all CHK employees today:

Good to know. I was wondering about the hedges - thanks, Pete.

[dismayed]

WSU, thanks for posting that link I was just about to go pull their 8Kfiling from Yahoo and see what is really going on with the company. It doesn't look to me like they have that much in liquid assets.

As for McClendon, basically he had to sell all of his common shares that were tied up in loans. He probably owned these shares both for financial gain and because it probably gave him more control of the company. Even though he sold all of his common shares, he probably still has options and restricted stock that gives him a stake in the company.

I was just looking over CHK's 8K filing and found this:

"We anticipate that our 2008 and 2009 budgeted exploration and development capital expenditures, together with our operating costs and other capital expenditure requirements, will exceed our cash flow from operations and our borrowing capacity under our revolving credit facility. To provide for our anticipated cash requirements, we expect to engage in additional monetization transactions, including sales of undeveloped acreage and non-strategic assets and additional joint venture arrangements. While we believe that some or all of these sources of liquidity will continue to be available to us, we would be required to curtail our capital spending if we were unable to access sufficient cash to fund our capital spending and operations."

[Pete]

My bigger concerns are:

1) Could this open CHK up to a hostile takeover?
2) What about the tens of thousands of acres McClendon has been buying up in east Edmond and NE OKC? Are these also highly leveraged and/or might he have to dump some of that property to cover his stock losses?
3) With CHK pulling back production and selling assets, how does that impact their plans for the 63rd & Western area? Not only the campus but the hundreds of other properties they own?

[Karried]

So, where does this all leave us as a company? Actually, despite a ridiculously low stock price, in excellent shape

Must be nice.

With so many people losing the value of their entire retirement portfolios and losing their homes, life savings etc, it's crazy to be that wealthy and to be able to take that kind of hit and still come out in 'excellent shape'.

Pete, I too, share your concerns regarding future projects.

I'm pretty convinced that we will start to feel the fallout ( if we haven't already) that the rest of the country has been experiencing. Hopefully, not as severely, but I believe we'll see a slowdown of construction projects, plans put on hold and a general sense of caution regarding spending money.

Buckle up and hold on tight.

Let's all hope that the bottom is very near and something drastic happens early next week to allay economic fears and stop the free fall of the market. I have a headache.

[dismayed]

One other thing. 1Q 2008 was weak for CHK, 2Q 2008 was a net loss, and I don't think 3Q 2008 figures have been released yet. Short term is probably going to be rough for them, long term they should be a profitable company. They are so highly leveraged that it seems like a takeover isn't outside the realm of possibility. But like Midtowner said, it depends on several things. One of them would be their corporate governance policies. Most modern companies have a lot of safe-guards built in by limiting the number of seats up for grabs on a board, who has what stocks, and so forth.

[bornhere]

I don't think it's an "Aubrey thing," if by that you mean a problem for McClendon but not many other people. Who else in CHK bought stock on margin following his example?

I'd take this as evidence we're not as 'recession-proof' as we'd like to think.

[Midtowner]

My bigger concerns are:

1) Could this open CHK up to a hostile takeover?

I can only answer the question I might know something about

First of all, "hostile" takeovers are interesting things. In a situation like this, yes, theoretically everyone is vulnerable. The first question is: "To whom is the company vulnerable?" The simple fact that at least right now, cash is king, and major financing is difficult to come by should assuage some fears of takeover. Furthermore, the current Board has a duty to protect the value the shareholders are going to receive for their investment. To that end, they can protect their company from hostile acquisition in a myriad of ways.

The best news I can tell you is that CHK will be in a very good position to turn down any offers to purchase the company as well as to defend against acquisition. Right now, the stock is, at least some might say, an extremely good deal, which means it's undervalued. The Board would probably be remiss to accept anything (significantly) less than the highs this year for an all-stock sort of deal.

There are of course other ways to acquire a company, e.g., greenmail, etc. I just don't think there's a huge danger of that because in this market, anyone who does have cash is hanging onto it.

If CHK is awash in cash as they claim to be, I'd expect them to be more likely to acquire other companies than to be acquired themselves. The same is doubly true for Devon.

[Pete]

My understanding is that while CHK has a billion in cash, they also have billions in debt. If things don't turn up for them, they may be forced to sell in order to stay afloat.

Also, McClendon dumped 7% of the outstanding shares on the market this past week. An interested party could easily snap them up and start buying more shares from others that may be forced to sell or are just wanting to bail.


I really, really don't want Aubrey or CHK to fail but it's clear they've engaged in some pretty risky business strategies and I'm more than a little worried. Hopefully they can weather the storm until things turn up again.

[Kerry]

So now we know why McClendon signed the bailout letter to Congress.

[bretthexum]

So now we know why McClendon signed the bailout letter to Congress.

LOL exactly. Save his own arse.

[Midtowner]

Also, McClendon dumped 7% of the outstanding shares on the market this past week.

To say he "dumped" wouldn't be the best term. He had to sell the shares to pay off a margin call. He borrowed money to buy some of his own stock, the lender saw what was happening and called the loan. McClendon had to sell his personal stake to cover the call.

That was his own personal bet/loss. His sale was definitely not due to his own lack of confidence, however.

[OKCTalker]

Two media executives were forced to sell substantial stakes in their companies last week when stock prices fell significantly: Sumner Redstone ($400 million in Viacom) and John Malone ($50 million in Liberty Media).

[Pete]

The markets are way up today and so is CHK, up 20% since Friday's close.

Hopefully things will stabilize from here and Chesapeake can get through this.


But with their persistent talk of selling assets, I wonder if they might try selling off their real estate holdings in OKC. At the very least, I can't imagine them doing much development anytime soon. Hopefully they can at least finish what they've started.

[Midtowner]

The markets are way up today and so is CHK, up 20% since Friday's close.

Hopefully things will stabilize from here and Chesapeake can get through this.


But with their persistent talk of selling assets, I wonder if they might try selling off their real estate holdings in OKC. At the very least, I can't imagine them doing much development anytime soon. Hopefully they can at least finish what they've started.

A higher stock price isn't going to help Chesepeake continue to do business. It will probably put a stop to margin calls, but the damage has already been done there.

The problem is still the availability of cash in banks. While the stock price might be a secondary indicator that money is becoming available, it's just evidence of a symptom, not the actual problem.

[Pete]

The higher stock price helps them tremendously if they decide to issue more common stock to fund their operations.

Also, the corporation also owns stock and when the value goes up, so do their assets and their ability to borrow against them.

[blangtang]

selling off their assets is not a sign of strength.

Also heard reports of spot nat gas prices of 3-4 bucks per MCF for the winter. that won't work for the nat gas companies in this state going forward. My buddy works in the industry and says they go to 'idle' below 5$ mcf....

there was a news report of them (CHK) selling of 2.5-3 Billion in assets. I'll have to look up the story. I thought i saw it on the PBS show at 6pm.

A big knock on effect is most of the small landman type companies have been working as subs for CHK. not good.

[blangtang]

I got burned before. I bought 100 shares of williams communications group WCG. i lost like 4200 bucks. however, they ended up building the 10 or 12 story tower in downtown tulsa. now that building is housed by the city of tulsa! bah!

i learned my lesson. At least i have capital losses to this day...

I hope CHK and DVN have better outcomes. i'm willing to support them.

[TStheThird]

Also heard reports of spot nat gas prices of 3-4 bucks per MCF for the winter. that won't work for the nat gas companies in this state going forward. My buddy works in the industry and says they go to 'idle' below 5$ mcf....

That is true. With the current cost of drilling, activity will go idle when prices fall below $5 mcf. Margins are slim on a lot of wells when it gets around $6 per mcf.