I just finished listening to the Chesapeake Energy (CHK) Q1 conference call. As with every quarter, I am left with the distinct impression that this is a company that one of the super-majors should be acquiring as soon as possible. The valuable acreage that CEO Aubrey McClendon and company have assembled is by far the class of the industry, and that acreage is still priced at a huge discount by the stock market in relation to prices that it can currently be sold for in joint venture transactions. An acquirer could pay a significant premium to the current stock price and still get a great deal. What could be better than locking up decades' worth of oil and gas production in the United States at a discount ?
With the help of the transcripts available on Seeking Alpha, I’ve put together what I think are the important parts of the call and added some observations.
Chesapeake is a land acquisition machine that I think is close to reaching the point where there is little left to acquire, but through the end of the first quarter it has still been very busy. McClendon provides us with details on two enormous new liquid rich plays:
... We have established industry-leading leasehold positions in two potentially very significant new liquids-rich plays.
The first of these is the 1.2 million net acres that we have acquired in Utica Shale play of far Western Pennsylvania and eastern Ohio. The second is the 1.1 million net acres that we have acquired in the Mississippian Carbonate play in Northern Oklahoma and Southern Kansas. We expect to initiate JV efforts in both of those plays in the 2011 second half, and to provide more production results from our efforts in both plays as the year progresses.
It is just amazing the size of the positions Chesapeake is able to put together in virtually every unconventional play in the United States. These two are just the latest. McClendon lays out the details on all of its positions in the various large plays:
Here are the 12 that we are in: the Granite Wash, Cleveland and Tonkawa and Mississippian plays in the end of Anadarko Basin in western Oklahoma and in the Texas Panhandle; the Eagle Ford Shale of south Texas; the Niobrara Shale in the Powder river and DJ basins, the Avalon, Bone Spring, Wolfcamp and Wolfberry plays in the Permian Basin, the Three Forks/Bakken play at the Williston Basin and the Utica Shale in Ohio. We believe it is simply unprecedented that we have assembled leading positions in 12 of the 13 most important liquids-rich plays in the U.S. and very attractive per net acre lease hold cost. This will lead to very substantial net asset value creation for Chesapeake shareholders for decades to come.
How is this not mouth-wateringly attractive for one of the big boys ? One big gulp of Chesapeake and they have their reserve growth covered for years and years. It has to be much easier than searching the rest of the globe for oil and gas, and Chesapeake can be had a very attractive price relative to the value of future production.
What many people take with a grain of salt -- but I’ve found has been verified again and again through joint venture transactions -- is the true value of Chesapeake’s acreage. McClendon walks us through the value of just the two new plays (Utica Shale and Mississippian):
In the meantime, I would remind you that recent liquids-rich JV acreage values have been in the range of $5,000 to $20,000 per net acre. Using something in the $10,000 per acre range, would indicate that these positions could be worth $23 billion to our company, combine that with the $7 billion of service company value pickup, and you can say that we are highlighting more than $30 billion of potential value creation in this quarter alone.
Given where our stock is valued at preopening today, I guess, I can say no good deed goes unpunished, and also I guess, I'm glad that we didn't highlight, say, $60 billion of possible value creation this quarter. Our stock might be down even more.
Don’t like what the stock market is telling you? Then sell the company for a fair price. I’d ignore his comments as hype, except that the transaction multiples are real, they occur frequently, and they aren’t likely going to decrease over time as resources become more valuable. To put in perspective what McClendon is saying, the enterprise value of Chesapeake is not much more than the value he suggests exists in just these two plays. That would imply the true intrinsic value of all of Chesapeake’s assets is a multiple of the current enterprise value.
And of course the big transition to liquids is happening at Chesapeake and it is happening quickly. Without the reputational baggage Aubrey brings as a bit of salesman, these achievements would be much more appreciated. Here is his update on the move to liquids:
Most importantly, our liquids production continue to grow rapidly, and we remain on track to reach 150,000 net barrels per day by year-end 2012 and 250,000 barrels per day by year-end 2015.
During the 2011 first quarter, we averaged 67,000 barrels per day. Quite an impressive jump from just 32,000 barrels per day two years ago in the 2009 first quarter. Just to remind you, we believe there are 13 significant liquids-rich plays currently under development in the U.S., and we have leading positions in 11 of them, a top 5 position in the 12th and have no presence in the 13th, which for those of you who are curious would be OXY's California play.
The stock market may never give Chesapeake the valuation that Aubrey thinks it deserves. The past few months has seen a 50% improvement in that valuation, though. As production continues to grow and effectively deleverages the company further, the valuation will surely improve. But a discount to transactional metrics may exist for a long time.
Shareholders, I think, are not going to see McClendon sell this company, given that he lost most of his stake in the margin call of 2008 and is therefore not motivated to sell the company. That is why I think a transaction here will likely be of the hostile variety -- not a common thing these days. Carl Icahn’s involvement is certainly interesting, but shareholders really need one of the mega oil players to take an interest.
I have some reservations about McClendon, which have kept me out of the stock (and missed a 50% gain) ... but I do admire his ability to acquire high-quality property in incredible size.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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