Saturday, August 20, 2011

The Chesapeake Energy ($CHK, $CHKDG) "Bold Plan" to Transform the U.S. Transportation Fuels Market

Readers may remember that we have written about Chesapeake Energy and its convertible preferred stock as an interesting inflation-agnostic trade. The company is not very levered, so the preferred should be a good, though unexciting, credit even in deflationary circumstances. Yet, the conversion option means inflation protection, and the company is arguably undervalued given current natural gas prices.

Recently, the company unveiled a "bold plan" to transform the U.S. transportation fuels market and reduce imports of oil. They formed a Chesapeake NG Ventures Corporation to invest at least $1 Billion in natural gas demand-enhancing investments over the next 10 years.

They are starting with a $150 million investment in convertible debt of Clean Energy Fuels Corp, which is installing LNG fueling infrastructure for the trucking industry along interstate highways. They are also investing $155 million for a 50% ownership stake in Sundrop Fuels, Inc., a privately held cellulosic biofuels company, which is supposed to produce gasoline from natural gas and waste cellulosic material. The first $35 million tranche of Chesapeake’s investment has been funded and the remaining tranches of preferred equity will be scheduled around certain funding and operational milestones to be reached over the next two years.

A Credit Bubble Stocks correspondent writes in with color about these developments:

Buying $50MM per year in convertible preferred in CLNE to accelerate the construction of natural gas “gas” stations . . . which should accelerate the build-out of new natural gas trucks and fleet vehicles. The convert has $1B in equity in front of it, and pays a higher rate than [the CHK] revolver costs . . .. so really just good PR, good push in the right direction, and cost of zero pretty much.

CHK also putting $30MM into a cellulosic ethanol company (that uses a lot of natgas in their process). CHK only gives them more if they hit milestones, and Kleiner Perkins was original investor.

So basically CHK’s “$1 Billion dollar venture fund to get us off OPEC dependence” is a $30MM investment to frame CHK as environmentally friendly, and push the natural gas agenda. They say they will spend $1 Billion total over ten years . . . (or $0.12 per year per share – and judging from the first two investments they will see a good return)
People hate Chesapeake for doing "crazy" stuff and being unpredictable, but these two investments honestly sound pretty good.

1 comment:

Felix Hoenikker said...

These investments aren't good. Look at the performance of their fuels experience to date. They've been trying to push CNG for a while now, with Boone taking an $80mm hit on the chin just to keep the company solvent. LNG is a waste of time....this company is scrambling for a sustainable business model bc nothings worked thus far. The projects they're looking at don't have fundamentals.