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Friday, May 11, 2012

Front Page Story in WSJ on "Costly Liabilities" for Chesapeake

Updates

Later, 9:30 p.m.: Chesapeake gets $3 billion loan; relatively high interest rate at 8.5%
"I would imagine that this is a relatively expensive source of financing for Chesapeake to feel compelled to pursue," ...[spokesman]

Wall Street has long benefited from Chesapeake's financing moves. Prior to the new deal, the Oklahoma City-based company had paid nearly $1 billion in investment banking fees since 2000...

Earlier on Friday, Chesapeake said it could delay asset sales in order to preserve cash flow needed to comply with requirements of its existing $4 billion corporate credit facility.
Original Post

Link here.

Embattled Chesapeake Energy Corp. has saddled itself with about $1.4 billion of previously unreported liabilities over the next decade through off-balance-sheet financial deals.

Most of these costs will hit this year and next, at a time when the company needs to raise substantial cash to cover operating expenses and its move into the more lucrative oil business.

Chesapeake, the second-largest natural-gas producer in the U.S., has made a number of long-term commitments to Wall Street banks that require it to deliver specific amounts of oil and natural gas each month through 2022, in exchange for upfront cash. Those deals, known as volumetric production payments, or VPPs, are essentially debts, with payments made in fuel rather than cash.

11 comments:

  1. The story is fraudulent. CHK disclosed the economics of the VPPs. They are basically the sale of a future royalty of a designated amount of production on a designated schedule. All disclosed. The cost is in the CHK LOE numbers. It hardly moves the needle. Even with this burden, CHK LOE costs are normal to low.

    The VPP is not a loan. It is a sale of oil or gas in place for future delivery as produced. The VPP is hedged so the price is locked in for the investor.

    It locks in the price and cashes in that part of the production at a present value.

    It is like a futures swap, with the cash paid now.

    CHK keeps some of the future production. That generally avoids a shortfall plus gives CHK cash from the well that more than covers the LOE.

    So, it was disclosed, not a big deal, and the story is fraudulent. One of many fraudulent attacks on CHK recently.

    BTW, analysts generally don't bother asking about it in their frequent opportunities. When asked, the question is answered.

    anon 1

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    Replies
    1. One of the reasons business is more "interesting" than politics is that we get a quarterly scorecard in business. Even on a daily basis, we have share prices to follow. We are certainly seeing that with JP Morgan today.

      On the other hand, at best in politics, we see the scorecard every two years for some, four years for the President, and six years for others.

      So we will get a chance to see how this plays out:

      "Most of these costs will hit this year and next, at a time when the company needs to raise substantial cash to cover operating expenses and its move into the more lucrative oil business."

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    2. Ummm Humm, this sounds like the subprime mortgage all over again, this time in the commodities market.

      Why didn't CHK just get a bank loan secured by future production if they needed cash or issue stock or bonds or any of a number of [other] ways to raise capital.

      And people wonder why companies need to be regulated. This right on the same day as the JPM "London Whale" fiasco. No problem here. No, everything is just hunky dory.

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    3. I might be misreading your comment, but the subprime mortgage issue was across the housing/real estate/banking industry.

      The WSJ story linked above involved one company. As you noted, most capital raised for oil and gas exploration, including by CHK, is through credit facilities, stocks and bonds.

      Delete
    4. The latest story, on the Fayetteville sale to BHP is not new. It was disclosed at the time.

      Anon 1

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    5. Yes, subprime mortgages involved the housing industry. However, the root cause of the meltdown was that unqualified borrowers were financed. How did that happen? It happened because borrowers sold notes after lending the money in a new and "creative" way (CDO) that supposedly reduced/eliminated risk of default. CDOs didn't exist before the boom. Finance industry invented them to "keep the show going." Same with cds.

      I am very leery of "creative financing" of anything. Especially when there is limited transparency and it is hard to get a straight answer that is comprehensible. I fully expect to hear more (not-so pleasant) details emerge. Just like the CEO's loans.

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    6. From my blog today:

      "Chesapeake has always pushed the envelope with aggressiveness and has a storied history. Over the last two decades the share price has had several booms and busts. The recent screaming over the FWPP and VPP’s have long been understood and known by investors. In fact, many investors have specifically avoided Chesapeake shares because of their concerns. Shareholders have long been unhappy and almost pulled off a coup at the shareholder meeting last year. This year things will change.

      Aubrey (known by his first name) and perhaps the board as constructed will not survive. The already cantankerous individual shareholders will now be joined by the institutions. Largest shareholder Southeastern Asset Management has turned on the Aubrey and the board. If the board does not fire Aubrey, my speculation is the directors up for election will not receive the majority votes required to be elected. Proposals put to the shareholders and supported by the board are in trouble too.

      This end to Aubrey’s Chesapeake career stands in stark contrast to his nemesis Bob Simpson from XTO Energy. Aubrey beat Simpson in the gas land grab. Simpson considered his outstanding two decade run, looked at the natural gas landscape and sold out to Exxon Mobil. Then Aubrey did well in the oil land grab! Hubris and over aggression will be marked as the reasons for Aubrey’s fall.

      The endgame did not have to occur in disgrace. Participation agreements are common place for promoters in the oil patch; they need to stand in the place of out-sized cash and share compensation, especially since they do not fit with large companies. Why was the news Aubrey borrowed against his well interests so big? I always assumed he borrowed to fund drilling! The additional conflicts of interest should never have occurred, thus the board is in trouble. The VPP‘s have always been known and are legitimate business practice. The company should treat them as debt; but the media ought not act as though the VPP’s are surprises. Additionally, the off-balance sheet discussion needs to include the drilling carries for Chesapeake’s account, which are not on the balance sheet either.

      Thus the endgame. Aubrey goes, and maybe the board too. The assets will be rationalized. Minority JV partners may take over asset plays. Complicated transactions will be wound down. Soon results will rival peers. Remember when the stock soared for a day over Aubrey losing Chairmanship? The asset base is ridiculous for the share price."

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    7. I'm simply an observer here. I have no dog in this fight. But I do get a kick out of this. Had natural gas not plummeted to $2.00 but rather was in same range as overseas (double-digit price), this whole story would be completely different.

      Two years ago (or thereabouts) I don't recall anyone talking about a natural gas surplus in America.

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    8. JJ Butler's blog is here:

      http://independentstockanalysis.com/

      Delete
  2. Reuters is leading another attack on CHK. Others follow mindlessly. Things that are not new are claimed to be new. It is a feeding frenzy of agenda driving hype.


    anon 1

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  3. This is the real news:

    http://www.chk.com/News/Articles/PressReleases/5-14-12%20Loan%20PR%20Final.pdf

    "(BUSINESS WIRE)--May. 11, 2012-- Chesapeake Energy Corporation (NYSE:CHK) today announced it has entered into a $3.0 billion unsecured loan from Goldman Sachs Bank USA and affiliates of Jefferies Group, Inc. The net proceeds of the loan, after payment of customary fees and original issue discount (if any), will be utilized to repay borrowings under the company’s existing corporate revolving credit facility.

    The new facility, which ranks pari passu to Chesapeake’s outstanding senior notes, matures on December 2, 2017 and may be repaid at any time this year without penalty at par value and carries an initial variable annual interest rate through December 31, 2012 of LIBOR plus 7.0%, which is currently 8.5%, given the 1.5% LIBOR floor in the loan agreement. During the remainder of the year, Chesapeake plans to complete asset sales totaling $9.0-$11.5 billion and intends to use a portion of the proceeds from these asset sales to repay the loan. Chesapeake has received strong interest from prospective buyers of its Permian Basin asset sales process and its Mississippi Lime joint venture process, and the company expects to complete these two transactions in the 2012 third quarter.

    Management Comments

    Aubrey K. McClendon, Chairman and Chief Executive Officer, said, “This short-term loan from Goldman and Jefferies provides us with significant additional financial flexibility as we execute our asset sales during the remainder of 2012.

    As previously announced, Chesapeake’s business strategy is evolving in 2012 from the unconventional resource play identification and leasehold capture strategy of the past seven years to a strategy now focused exclusively on developing the 10 core plays in which we have built a #1 or #2 position and on continuing our transition from natural gas to liquids, reducing capital expenditures and paying down long-term debt. We believe Chesapeake has built the nation’s best collection of E&P assets, and we are 100% committed to delivering on the very substantial growth and value embedded in these assets for our shareholders through a relentless focus on developing our 10 core plays.”

    Conference Call Information

    A conference call to discuss this release and our quarterly filing on Form 10-Q has been scheduled for Monday, May 14, 2012 at 8:30 am EDT."

    anon 1

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