Thursday, August 9, 2012

How Good is Chesapeake at Timing Asset Sales ($CHK)

A Credit Bubble Stocks contributor writes in,

Question: which of Chesapeake’s assets took the biggest hit to value in the quarter?

Answer: Their Granite Wash asset, which produces a ton of NGLs and sells them into Conway, KS (the much worse of the two NGL hubs). Unlike wet Marcellus, which gets most of its value from gas and has cheapish wells, Granite wash wells are expensive, but previously were the company's highest IRR wells because they produce thousands of barrels of NGLs. Clearly this asset is worth a lot less than before.

You will note that CHK sold the Granite Wash trust earlier this year as well as a $750 million VPP on granite wash production!

I would also point out that CHK is very shrewd and rarely gets credit for the smart things they do. This isn’t surprising considering the smart things they do are occasionally at odds with what they say publicly, but two recent examples:

1) For all of the talk about CHK not being hedged for gas this year, let’s not forget that they sold their Fayetteville shale asset to BHP a year and a half ago for $4.75 billion. This was their highest-cost dry gas shale and included a significant amount of their production. BHP just took a write-down of $2.8 billion on this asset. Spread across this year, the implied 'gain' from selling their worst gas asset and associated production would make this their most profitable year of hedging of all time. Chesapeake previously owned an even higher-cost dry gas shale called the Woodford. They sold this to BP in 2008 for $1.75 billion – I would value it at $250 million today. A side-effect of running things so close to the line is that the company has had an excuse to consistently sell their worst assets; while most give them credit for the assets they’ve put together, they get no credit for the assets they have wisely gotten rid of.

2) When Chesapeake was caught un-hedged at the beginning of this year they announced 1 bcf/day of shut-ins (which were gross, so only about half was net to CHK, and it was their highest cost production). This moved the market up and got them better prices for the un-hedged production they were selling, more than making up for cash flow they were losing on shut-in volumes. Now that prices have recovered, they put on a significant hedge (and may be adding more), while turning back on all of the shut-in volumes. This gets them more cash flow, more certainty, and holds down prices and expectations for an industry under a lot of pressure, which will lead to additional rigs being laid down and even better pricing next year.

Widely regarded as the gang that can’t shoot straight at present, CHK is still in my mind among the very best companies operationally and strategically. They have unquestionably failed to manage their balance sheet and finances – strong oversight was and is needed. Being un-hedged this year was probably their first major misstep, which was compounded by their funding gap. While it seems like they bet the farm on gas prices this year, in reality, the sale of the Fayetteville, the sale of 25% of the Barnett for $2.25 billion to Total (next highest cost), and the sale of billions in VPPs (essentially permanently hedging out those volumes) have dramatically reduced their gas price exposure.

2 comments:

portland_allan said...

My concern is that they get such a reputation of screwing buyers that no one wants to buy from them anymore.

Then again, people still sell to Warren Buffet. Go figure.

BTW, did you see this "U.S. government said it will stop issuing permits for new nuclear power plants and license extensions for existing facilities until it resolves issues around storing radioactive waste."

The "waste issue" ain't ever going to be resolved. The enviros won't let it be resolved. And this obviously can all change after the next election, but still... no coal, no nuke. NG keeps looking better & better.

Also from the article, "There are 14 reactors awaiting license renewals at the NRC, and an additional 16 reactors awaiting permits for new construction. There are currently 104 operating nuclear reactors at 64 plants across the country."

wildcat said...

I think these sales will actually work out well for all of the buyers in the long term (Except for Plains, who comletely overpaid for the Haynesville at the top)

CNOOC did very well with the Hayneville JV and it looks like the PRB is going to work out.

Total has gotten crushed on the Barnett JV, but just came back to JV the Utica. The Barnett should work out once gas comes back.

Similarly, the Fayetteville shale should ultimately work out okay for BHP, they take a long-term view.

BP should probably give up on the Woodford, but that might turn out to be their best deal of the last decade considering what else they have done (other than their sale of Entrada to Callon for $180MM - a property that was leased by ATPG three years later for $200k).

The VPP buyers are hedged, so they should be fine as well.

I really don't think CHK "screws" buyers. CHK's assets are so cheap, that they can sell the least desirable ones at 15% IRRs to the buyer and re-invest in their other projects at much higher rates of return.

They do seem to be very good at timing things, but like you said, if people are still going to sell to Warren Buffett, they certainly aren't going to give CHK credit for knowing where commodities are going.