On Monday, Forbes magazine wrote about Chesapeake Energy’s new financial plan—an effort to raise $10 to $12 billion and pay down a “mountain of debt”—calling it “desperate measures for desperate times.” (Bloomberg BusinessWeek, The Wall Street Journal, and The Financial Times, among others, also reported on the plan.) Forbes’ Christopher Helman wrote:
Chesapeake Energy is in a bind. It’s the second-biggest natural gas producer in the country after ExxonMobil. But with natgas prices having fallen to their lowest levels in a decade ($2.40 per thousands cubic feet), Chesapeake isn’t generating enough cash.
Chesapeake has curtailed its drilling in some plays, and in January said it would shut in production of marginal gas fields. But the company has $10 billion in debt to service and is obligated to keep drilling wells on newer oil and gas leases in order to hold the land. Over the course of 2012, if gas prices were to stay where they are now, Chesapeake would face a cash shortfall of several billion dollars.
The Oklahoma City oil and natural gas company’s CEO, Aubrey McClendon, is known for his “legendary financial finagling,” but Helman wondered if that would “save the day” this time.
The company says it aims to raise $2 billion by spinning off assets from its service company and pipeline division. It expects another $2 billion from upfront sales of future flows from gas fields. And it earmarks another $6 billion or so from the sale of its largely undeveloped acreage in the oil-rich Permian basin. And for good measure, it will raise another $1 billion by issuing more senior debt.
Analysts and energy experts are divided on the plan. “It’s an ambitious agenda,” Blair Thomas, chief executive of private equity group EIG Global Energy Partners, told Forbes. “But [McClendon] is one of the most remarkable value creators in the oil and gas sphere. People underestimate him at their peril.” Analyst Bob Brackett of Sanford Bernstein said: “This response is not a winning combination in our view,” saying the upfront sales of future oil and gas volumes are actually just debt stuffed into a different place on the balance sheet.
Other commentators have criticized the plan as well. Eric Rosenbaum, writing for The Street, offered “7 Reasons to Be Cautious on Chesapeake Energy’s Plan,” saying, “the willingness to sell all of the Permian was the big surprise in the announcement, and it could be one more sign of how serious Chesapeake’s cash issues are.”
The short-term funding gap concerns may be put to rest through the latest release—if the company follows through on the execution—but for Chesapeake and CEO McClendon, if they don’t believe they have been backed into a corner, it sure feels like they are fighting their way out of one.
Commenters on OKC’s popular satire blog The Lost Ogle expressed even gloomier sentiments and drew comparisons between Cheseapeake’s problems with those of Enron and AIG.
“It is fairly common knowledge among people in the city, within the industry, that CHK is not a strong healthy company. My father and uncle have both said that CHK would be the Enron of OKC,” commenter Paul noted.
A blogger for Business Insider, though, put a more positive spin on things. “Today’s news that Chesapeake (CHK) is going to sell $12BN in assets in response to continued weak natural gas prices looks like good news,” Simon Lack wrote. “Depending on the buyers, it’s possible that the new owners could have a sufficiently long horizon that they won’t need to drill just to generate near term cashflow to finance debt payments. And it may also demonstrate that there are many buyers for natural gas assets in spite of the lousy current economics caused by excess supply.”
—Holly Wall, News Editor
