Chesapeake Business Practices

[PhiAlpha]

I predict both Chesapeake and Sandridge will probably be a thing of the past in a few more years. Not to worry Aubrey will probably have his private company alive and well to at least take over where Chesapeake once was.

You obviously aren't very involved in the oil and gas industry if you think CHK will be a "thing of the past". I've seen nothing to indicate that selling out completely is their intention, not to mention they are finally turning things around and their largest shareholder has moved from active to passive. All of the doomsday predictors fail to realize the extent of and value in their massive asset base which they've finally begun to effectively develop over the last year or two.

Sandridge would be more likely to follow that path but they seem to have righted the ship. At any rate, a change of control at either company wouldn't mean that they were definitely leaving OKC.

[soonerguru]

I wouldn't want to bet against SD & CHK being here a long time.

I also wouldn't want to bet against a guy who founded a company, grew it, and when the stock fell below $1.00, RE-GREW it to around $70/# before the global financial collapse.

Say what negative things you will about Aubrey, but remember that it was his aggressive application of fracking & horizontal drilling that produced so much natgas, and in turn drove down prices.

So he should be credited for screwing himself by over-producing his commodity so much his company nearly bankrupted itself when the commodity price dropped to unsustainably cheap levels?

[tomokc]

I chose to say it in a less obnoxious way than you, but to each his own.

[PWitty]

Double post

[PWitty]

So he should be credited for screwing himself by over-producing his commodity so much his company nearly bankrupted itself when the commodity price dropped to unsustainably cheap levels?

He produced so much gas because he wanted to show the US and the world how abundant US natural gas was. He truly believed that when it became obvious how abundant natural gas was in the US, that US policy and the market would aggressively shift and increase the consumption of natural gas enough to compensate for the increased supply. That aggressive shift just never came to fruition.

[PhiAlpha]

He produced so much gas because he wanted to show the US and the world how abundant US natural gas was. He truly believed that when it became obvious how abundant natural gas was in the US, that US policy and the market would aggressively shift and increase the consumption of natural gas enough to compensate for the increased supply. That aggressive shift just never came to fruition.

The shift is definitely happening but you're right, not as aggressively as once hoped

[Teo9969]

To be sure, of course he hoped it would.

Had the shift already occurred, CHK would be on the path to laughing its way past Target, Microsoft, Wells Fargo, Proctor & Gamble, and Bank of American into a Top 20 revenue company in the US.

...I don't think people fathom what Aubrey was building, and had he had the sway to rapidly push NG to the next level, he would have made the 400% he paid for everything look like diced up pennies.

But he gambled, and he did not win.

[Just the facts]

He produced so much gas because he wanted to show the US and the world how abundant US natural gas was. He truly believed that when it became obvious how abundant natural gas was in the US, that US policy and the market would aggressively shift and increase the consumption of natural gas enough to compensate for the increased supply. That aggressive shift just never came to fruition.

That is because the national focus is on walkability, mass transit, and removing the need for any type of fuel. A cheap fuel is counter productive to those efforts (which have a much broader agenda) so CNG isn't seen by a lot of people as a solution, but an extension of the problem. The same goes for electric cars.

[tomokc]

To be sure, of course he hoped it would.

Had the shift already occurred, CHK would be on the path to laughing its way past Target, Microsoft, Wells Fargo, Proctor & Gamble, and Bank of American into a Top 20 revenue company in the US.

...I don't think people fathom what Aubrey was building, and had he had the sway to rapidly push NG to the next level, he would have made the 400% he paid for everything look like diced up pennies.

But he gambled, and he did not win.

Teo - The company was built by paying too much for people, production and property. It was only a matter of time for a collapse to occur. New leadership is laying off people (so say the rumors), they are paying reasonable prices for leases, and selling non-core real estate.

[Rover]

Most people are not visionaries and avoid risk. They would run companies according to the least common denominator. That is why most companies struggle to be just like every other company. Love him or hate him, AM shook up the industry and created a very large company with huge assets which predatory investors will now feed off. Thousands and thousands of other oil companies have come and gone since he started building Chesapeake. Whatever the ultimate size it will still be one of the major gas companies in the US while others played it safe and are already gone.

[HangryHippo]

Teo - The company was built by paying too much for people, production and property. It was only a matter of time for a collapse to occur. New leadership is laying off people (so say the rumors), they are paying reasonable prices for leases, and selling non-core real estate.

The rumors are fact. There were layoffs last week and more are coming.

[Teo9969]

Teo - The company was built by paying too much for people, production and property. It was only a matter of time for a collapse to occur. New leadership is laying off people (so say the rumors), they are paying reasonable prices for leases, and selling non-core real estate.

Let me restate:

Aubrey McClendon gambled, and he did not win.

Had he won, all his paying too much would have looked like diced up pennies.

There's a reason CHK still has the chance to be a strong company, and that's because CHK, under the direction of McClendon, bought up more acreage than any company in the world save the Perennial Top 5 largest company in the world, Exxon.

It's actually pretty impressive that a company as "poorly" run as CHK was can sell off tens of billions of dollars worth of assets and still have anything left to run a business

...well, they have a TON left to run a business.

Now, imagine NG prices never dropped below $7.50...

[Pete]

Wanted to pass on something I heard this weekend about Chesapeake...

I have a good friend who is very, very well connected in the oil & gas industry who was in from Texas for my class reunion. Almost daily, he's dealing with Devon, CHK, SandRidge and many others -- and dealing at the highest levels. Knows LN, AKM personally. And I know he's not a BSer because I've known him a long time and am very familiar with his business track record, which frankly always makes me feel a bit envious.

He told me a long time ago that he was extremely worried about Chesapeake, and this was before there was any signs of real trouble. He partners with these companies in drilling wells and drills on behalf of his own companies and has repeatedly said that no one else in the industry could justify what CHK was paying for these wells... That essentially they had been paying about twice the going market everywhere. This in addition to all their corporate excess that has now been so well documented.

So this weekend he told me -- unsolicited -- that he is still very worried about CHK and he still thinks they do not have a sustainable business model. They simply have too much in these properties and wells to ever make real profit.

I truly hope this doesn't prove to be the case but I can assure you that he knows what he's talking about. I tried to talk him into a sunnier outlook, reminding him of the new CEO, corporate changes, etc. But he simply said they have too much money in, so they lose massively when they sell anything (this has certainly proven to be true) and will never make enough on their assets to sustain themselves and reminded me they typically carry tremendous debt on their assets, often more than what they have proven to be worth. So, no matter what they do, such as selling assets, it actually costs them money.


As everyone knows, I hate to be negative but this shook me up a bit. I hope the new CEO can work some magic.

[ou48A]

For many years CHK's best bet has been to become as oily as they can and to reduce debt.

I had numerous conversations with people who know LN , AKM, TW and others 10-12 years ago about the poor business practices of CHK only to be told that things would fine. Having seen the oil bust of the 80's I knew that similar high flying companys who became too over extended did not make it. The lessons of the oil bust were out there for anyone familiar with the business and they were not that long before. The SD story sounds very similar. These guys should have known better but they were to smart to learn the lesson of the oil bust of the 1980's

I would be likely be looking for another job if I worked in the SD or CHK corporate offices.

[rlewis]

I don't think things are as dire as they may seem. If you look at their latest financial statements, their financial fundamentals look much better. Their operational cash flow is strong, and their debt service does not look overwhelming. If gas prices remain stable, they will likely be able to work their way out of the bind that they got into.

There are some positive signs from Chesapeake insiders as well. Carl Icahn is continuing to add shares, even though the stock prices are up 50% from last year. Also the new CEO just bought a $3.275M mansion in Edmond from PGA golfer Bob Tway two weeks ago. That doesn't tell me that there is panic in the highest ranks of the company.

The layoffs and the property sales are an unwinding of some of the excesses and inefficiencies put into place by the previous regime. There is a short-term downside to the OKC market because of this (and I feel bad for all of those affected by the layoffs); but I think that in the big picture of things, Chesapeake staying afloat is the most important thing for the local economy.

[PhiAlpha]

I don't think things are as dire as they may seem. If you look at their latest financial statements, their financial fundamentals look much better. Their operational cash flow is strong, and their debt service does not look overwhelming. If gas prices remain stable, they will likely be able to work their way out of the bind that they got into.

There are some positive signs from Chesapeake insiders as well. Carl Icahn is continuing to add shares, even though the stock prices are up 50% from last year. Also the new CEO just bought a $3.275M mansion in Edmond from PGA golfer Bob Tway two weeks ago. That doesn't tell me that there is panic in the highest ranks of the company.

The layoffs and the property sales are an unwinding of some of the excesses and inefficiencies put into place by the previous regime. There is a short-term downside to the OKC market because of this (and I feel bad for all of those affected by the layoffs); but I think that in the big picture of things, Chesapeake staying afloat is the most important thing for the local economy.

I certainly hope Pete's source is overstating the conditions there. They do seem to be dramatically improving. Rome wasn't built in a day (of course it didn't fall in a day either).

[onthestrip]

I don't think things are as dire as they may seem. If you look at their latest financial statements, their financial fundamentals look much better. Their operational cash flow is strong, and their debt service does not look overwhelming. If gas prices remain stable, they will likely be able to work their way out of the bind that they got into.

There are some positive signs from Chesapeake insiders as well. Carl Icahn is continuing to add shares, even though the stock prices are up 50% from last year. Also the new CEO just bought a $3.275M mansion in Edmond from PGA golfer Bob Tway two weeks ago. That doesn't tell me that there is panic in the highest ranks of the company.

The layoffs and the property sales are an unwinding of some of the excesses and inefficiencies put into place by the previous regime. There is a short-term downside to the OKC market because of this (and I feel bad for all of those affected by the layoffs); but I think that in the big picture of things, Chesapeake staying afloat is the most important thing for the local economy.

You make some good points but this isnt one of them. The new CEO buying a big, pricey house tells us nothing. I mean, the CEO is making out like a bandit from day one on the job. Not to mention he has probably done well in his past occupations.

[rlewis]

You make some good points but this isnt one of them. The new CEO buying a big, pricey house tells us nothing. I mean, the CEO is making out like a bandit from day one on the job. Not to mention he has probably done well in his past occupations.

What I meant by that statement is that people with an uncertain financial picture don't spend that kind of money if they are the captain of a sinking ship. If you felt like you might be laid off in the near future, would you go out and buy an expensive house? I seriously doubt it--even if you were making a lot of money right now.

CEOs' personal behaviors are some of the best ways to truly gauge the business conditions within a company. They are privy to much more financial information than just about anyone. There are some ignorant CEOs out there (like we saw during the financial crisis), but Doug Lawler doesn't come across as one of them.

[soonerguru]

You make some good points but this isnt one of them. The new CEO buying a big, pricey house tells us nothing. I mean, the CEO is making out like a bandit from day one on the job. Not to mention he has probably done well in his past occupations.

And not to mention he'll make out like a bandit win or lose. Sometimes it pays better to get fired in corporate America. I'm sure he'll be able to handle the house payment. Also, depending upon his employment contract, it's likely that Chesapeake will have to take a hit on his house if it loses equity or something. This is the way things are done, so no matter what the CEO does / buys, his rear end is covered by the corporation.

[pw405]

I certainly hope Pete's source is overstating the conditions there. They do seem to be dramatically improving. Rome wasn't built in a day (of course it didn't fall in a day either).

My experience in the industry is that somebody who is active in drilling (knows the about well creation costs) isn't active or knowledgable in geology, production, or geophysics which may ultimately determine a if the cost of a well is recouped. Chks last press release stated they are running about 70 rigs now, down from about 200 a few years back. Rigs costs over around $50k a day to run if not more, so they are certainly cutting costs there. Perhaps more important, is that the drillers and rig workers often wait a long time between completing a well, and knowing production figures. It isn't uncommon to have many wells waiting on completion, and the wells can produce for a long time after they start. Unless he was a chk employee and had direct access to all of their production figures, selling prices and exact well costs, I think it would be pretty hard to determine if their wells were profitable or not.

[Pete]

My experience in the industry is that somebody who is active in drilling (knows the about well creation costs) isn't active or knowledgable in geology, production, or geophysics which may ultimately determine a if the cost of a well is recouped. Chks last press release stated they are running about 70 rigs now, down from about 200 a few years back. Rigs costs over around $50k a day to run if not more, so they are certainly cutting costs there. Perhaps more important, is that the drillers and rig workers often wait a long time between completing a well, and knowing production figures. It isn't uncommon to have many wells waiting on completion, and the wells can produce for a long time after they start. Unless he was a chk employee and had direct access to all of their production figures, selling prices and exact well costs, I think it would be pretty hard to determine if their wells were profitable or not.

That's great info -- thanks for sharing.


To counteract any worry I will state that these oil guys are competitive and always sure THEY are right and everyone else is wrong. That may be playing into this.

I also know my friend has never liked Aubrey personally and that may very have colored his opinions.

[pw405]

That's great info -- thanks for sharing.


To counteract any worry I will state that these oil guys are competitive and always sure THEY are right and everyone else is wrong. That may be playing into this.

I also know my friend has never liked Aubrey personally and that may very have colored his opinions.

This is merely an educated guess, but I would think that production figures for specific wells are highly guarded company secrets, as you don't want your competitors to know where the pay dirt is.

[ou48A]

.

[ou48A]

Guarding the secret's of well production numbers is normal.... This is often done to buy addition near by drilling (leases) locations at cheaper prices.

But in most cases a state will eventually make a company publish the well results after a period of time.
For many decades you have been able to read the well results in Oklahoma newspapers.

[PhiAlpha]

This is merely an educated guess, but I would think that production figures for specific wells are highly guarded company secrets, as you don't want your competitors to know where the pay dirt is.

Whatever the case, the market seems to like what CHK is doing. The stock is at at least a 52 week high.