Chesapeake’s rivals circle ahead of sales
By Ed Crooks
Opaque accounting, strained liquidity, large off-balance sheet liabilities, questionable corporate governance: Chesapeake Energy ticks all of the boxes for a company that investors should beware of.
It is also the second-largest natural gas producer in the US and has a collection of some of the most attractive oil and gas assets anywhere in the world.
Having flown too high, Chesapeake has to jettison some of its best properties to stay aloft, and its competitors are gathering to see how much they will be able to pick up.
The company has already identified two deals as it targets asset disposals of $11bn this year, to close the gap between its enfeebled cash flows, hit by US natural gas prices that have fallen to10-year lows, and its ambitious capital spending plans.
Some analysts believe it will have to go much further to bring its debts under control.
“Chesapeake is fixable,” says Jon Wolff of ISI Group, who says there are least $25bn worth of “crown jewel” assets that would find a ready market. “Management needs to make clear that reducing leverage is a much bigger concern than funding growth. The time to act is now. ”
Investors who have seen their shares drop 44 per cent in the past six months may tend to agree. Southeastern Asset Management, the largest shareholder with 13.6 per cent, has urged the board to talk to any potential bidders that may come forward.
Carl Icahn, the activist investor, is also rumoured to be building a stake again. He bought into Chesapeake late in 2010, pushed the company into asset sales that raised the share price and sold out the following year for a profit of more than $500m.
The issue is whether a higher value will be realised by breaking the company up or accepting a bid for the group as a whole.
Chevron, which is the second-largest US oil company by market capitalisation but has been relatively slow in acquiring American shale reserves, would top the list of possible buyers. Total of France or BHP Billiton of Australia might also be interested.
Chesapeake’s principal assets are leases to produce oil and gas across a vast area of the US: roughly 15m acres, or twice the size of the state of Massachusetts.
Aubrey McClendon, Chesapeake’s chief executive, began his career as a “landman”, a specialist in doing deals for drilling rights and he led the company into the country’s most ambitious programme of lease acquisitions over the past decade.
The company is now the largest or second-largest leaseholder in many of the most productive or promising areas in the US for producing shale gas and oil: resources that were previously inaccessible but have been unlocked in the past 10 years by improvements in techniques of horizontal drilling and hydraulic fracturing or “fracking”.
The perennially bullish Mr McClendon believes that those assets, even after this year’s planned disposals, are worth $50bn-$60bn. Realising their full value, however, will not be easy.
The biggest deal that Chesapeake plans this year will also be the easiest: the sale of 1.5m acres of leases in the Permian Basin oilfields of west Texas and New Mexico. The data room showing details of those fields opened earlier this month and has attracted widespread interest. The reserves are attractive because they include large volumes of oil, which has held its price much better than natural gas.
Chesapeake suggested it might raise $5bn from the sale.Analysts believe a price of $6bn or higher is possible.
Al Walker, the new chief executive of Anadarko Petroleum, one of the leading US independent oil companies and a partner of Chesapeake’s in wells in the Permian region, said this week that it would “take a look” at those assets.
Mark Hanson, an analyst at Morningstar, says others such as Devon Energy, Apache and Occidental are all possible buyers, as is Chevron.
Not every deal can be expected to go so smoothly, however. The other transaction Chesapeake plans for this year is a joint venture for its 2m acres in the Mississippi Lime region of Oklahoma and Kansas, which like the Permian sale is intended to close by the end of the third quarter,
Most of the international companies that were interested in doing joint ventures with US groups to learn about the shale revolution have now found partners – Chesapeake itself has done six such deals – and some have found that the results in terms of financial performance and acquiring capability have been disappointing.
Oil India has been reported to be interested and has been looking generally at the US, but Indian companies have a record of caution in oil and gas deals.
Two of the largest transactions in the industry recently, the sales of Samson Investment and the oil and gas production business of El Paso, have involved private equity buyers. When Chesapeake comes to sell further assets, it is likely to find other constraints on the number of possible buyers.
But Chesapeake’s assets, which in many cases will require strong management and heavy capital spending to develop, are often less attractive for private equity buyers.
In some cases, Chesapeake also has a clock ticking on its assets. Some leases stipulate that the leaseholder needs to drill a certain number of wells in order to retain them. So if Chesapeake cannot fund its drilling, the assets will begin to evaporate.
Under pressure to sell, says Philip Weiss of Argus Research, Chesapeake may not be able to maximise the value of its holdings.
“I admit they’ve had a pretty good record at doing deals, but I wonder when the first buyers are going to start to say ‘I’m not going to pay that’,” he says.
Chesapeake is talking about selling more of its non-core assets. But to raise the funds it needs, it will need to put on the block more of its prime properties such as its acreage in the Marcellus and Utica shales of Pennsylvania and Ohio, according to Mr Wolff of ISI.
By doing so, adds Biju Perincheril of Jefferies, it could be giving up future growth.
“If you are selling assets, there is a risk that you can end up just running in place,” he says. “You can be drilling wells and adding production, but constantly selling assets so you never get any top-line revenue growth.”
Mr Hanson of Morningstar expects that Chesapeake will make the disposals its needs to make this year and “live to fight another day”.
But he adds: “When you see this crown that they assembled, and you see the company having to pick so many jewels off it, you’ve got to wonder: at the end of it, what will be left?”
Faced with that prospect, a takeover could seem an increasingly attractive prospect. http://www.ft.com/intl/cms/s/0/c52507b8-9f8c-11e1-8b84-00144feabdc0.html#axzz1vDEvoAVE