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Unconventional Oil Plays Not Appreciated by Investing Public


Swizzled

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I've listened to Aubrey now for several quarters talking about how significant the position is that CHK has established in unconventional oil plays.

 

I watched what he did with natural gas land accumulation, and I don't doubt that if he is saying they are doing something big on the oil front that they in fact are.  Until now I've resisted the urge to make CHK a sizable position.  As the drum beat grows louder (via production ramping up) from these plays it is getting harder to ignore.

 

Here is Mark Papa of EOG on the significance of what is happening.  He is pretty well respected as being a straight shooter.  CHK has the biggest positions in the best plays.  It is a little late on a Saturday, but I think I'll start building a position on Monday knowing it is going to take production ramping up to have this reflected in the share price.

 

http://valueinvestorcanada.blogspot.com/2010/11/mark-papa-says-shale-plays-have-altered.html

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Very interesting read. I think the market still considers CHK a gas play and believe Gas will be in the dumper for a while. I think we can buy after we see the numbers / economics from one of the plays for not much more in the future.

 

Also CHK keeps saying liquids vs gas. I think they will kill the NGL market. They are too good what they do. Its on the watchlist and I will likely buy leaps at some point, but think we have plenty of time.

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I think you are likely correct and that there won't be recognition of these assets until the production ramps up.  CHK would obviously also do very well if natural gas prices went up.

 

The thing about the production ramp is that there is virtually no risk that it won't happen.

 

What really amazes me is something like the transaction below is completely ignored by the stock market.  CHK didn't even enter the Eagle Ford until last fall, went in and amassed a position spending $1.4 billion.  Now they just sold a 33% interest in this play for $2.2 billion. 

 

So they keep 67% of the play.  Have the value set by the transaction as being about $4.4 billion for what they retain.  And what they are left with actually cost them a negative $800mil.  And the stock market yawns.  That is something like $7 per share in value created on a $22 stock in a few months and the stock doesn't budge.

 

http://valueinvestorcanada.blogspot.com/

 

"First, it creates value. The latest example is the Eagle Ford Shale. CHK was a late entrant

with first leases acquired in 11/09, reached 300,000 net acres by 3/10, reached 625,000

net acres by 10/10, invested $1.4 billion, have agreed to sell 200,000 net acres for $2.2

billion, leaving 425,000 net acres and 2.3 billion Boe possible to CHK at a negative cost of

$800 mm. What value did this create? We think $7-10 billion."

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This is what happens when a CEO losses the Street.

 

Thats all well and good but Wall Street wants more cash flow and less debt. If I was CEO I would actually sell acre and pay down debt. It seems like they have way more acre then they know what to do with so why not sell off 1 play completely for cash and not a JV and use it to fund further drilling or debt reduction.

 

That would get the Streets attention. The capital structure is screwed up in a situation where the commodity they produce is entering a bear market, which may not be a downturn but may be a paradigm shift.

 

Also despite the sales, at this price Gas just isnt worth much. The majors have cash and have to keep production flat to protect their share price. Maybe they can also push Congress a bit more to help develop other uses for that gas. I think when Analyst model production at $4 gas or less, they just dont see much value. Logically we are awash in gas and the prices arent likely to improve. Its hard to break that sentiment. In reality its hard to put a value on all that gas. If all these plays come online everyone knows they will crush the gas pricing.

 

I fear that SD is falling into the same trap in terms of disappointing the Street.

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I know longleaf owns a lot of this.

 

Check this out from wikipedia:

 

"It was announced on October 10, 2008 that McClendon sold approximately 33.4 million shares, essentially all of his stock in Chesapeake Energy (stock symbol CHK) for $16.52 per share to meet a margin call after the drop in the U.S. stock market that week. Prior to the stock market turmoil, the stock had been worth as much as $74.00 per share in the last 52 weeks, a loss exceeding $1.92 billion.[4] McClendon was shortly thereafter awarded a controversial one-off $75,000,000.00 'Well Cost Incentive Award' by the board of directors.[5] The award was subsequently challenged by way of a shareholder proposal[6] and a number of law suits"

 

and

 

"He was the highest-paid CEO at all S&P 500 companies in 2008, receiving a compensation package totaling $112 million."

 

So, this guy is one of the highest paid CEO's in the country and he now has 0% of his net worth in stock.  Also, according to Morningstar, the company has underperformed its peers under the past 10 and 15 years, by -1.57 and -7.41, respectively.

 

 

On the bright side, It looks like he still has 15,000,000 share or so thanks to some RSAs. If he sold all of his stock like wikipedia indicates, what's going on here?

 

Now, I know longleaf has done way, way more research than I've done, but doesn't all this raise more than just a red flag?

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"Now, I know longleaf has done way, way more research than I've done, but doesn't all this raise more than just a red flag?"

 

CEO Aubrey is what makes this interesting.  Both good and bad really.

 

In the fall of 2008 when the world was falling apart and stocks dropping to prices that were unimaginable a year earlier Aubrey lost all of his CHK holdings through margin calls.  It seems he was on margin to buy hundreds of millions of dollars of CHK in addition to his huge stake from being a co-founder of the company.

 

So two parts to this.  1) He is an idiot to use margin and got caught out in a 1 in 50 year financial mess 2) He really, really believes in CHK to be out margining up to gain even more exposure.

 

He is a salesman and some of the payments the BOD have granted him are controversial.  He is also an exceptional land man and amassed an incredible asset base before anyone else had the vision to do it.  The majors are now coming to him to buy property.

 

He is part of the reason I'm not already a large shareholder as I question his judgement in margining up personally.  He is also part of the reason I'm so interested in becoming a shareholder.

 

http://valueinvestorcanada.blogspot.com/

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