Earnings Notes III (Q4 2023)

Chesapeake Energy Corporation (CHK)
Investors liked Chesapeake's earnings announcement this week, sending shares up about 10%. The key was that the company promised to cut capital expenditures and let production fall! They said that they will cut capex by 20% and expect production to be 22% lower in 2024 than 2023. That's a difference of 770 million cubic feet which is about 0.65% of U.S. production; not insubstantial. Chesapeake's announcement was also enough to lift the futures curve for natural gas.

The market capitalization (after the release) is now $11 billion. The company has $1 billion of net debt so the enterprise value is $12 billion. During the fourth quarter of 2023, cash from operations was $470 million and capital expenditures were $379 million for free cash flow of only $91 million, a FCF yield on the enterprise value (annualized) of a mere 3.3%.

Chesapeake is not earning its cost of capital at these natural gas prices, but with so little debt, you have a call option on natural gas that is not in immediate danger of expiring. Management points out in the investor presentation that there is going to be 12 bcf/d of LNG export capacity coming online by 2028. They think that the realized netback per MCF will be $4-6, far above the current $2.87 average realized price in the third quarter. With a cash production cost of over $1/mcf, there is subsantial leverage to higher natural gas price if LNG export drives a higher commodity price. (At $5/mcf, earnings more than double.)

Still, there are other ways to get exposure to natural gas that do not require so much capital and operating expenditure. Dorchester Minerals (DMLP) is getting about one-third of production (in BOE terms) from natural gas, which is being practically given away for $2/mcf. And we will look at Blackstone Minerals and Kimball Royalty Partners below.

Marathon Petroleum Corporation (MRO)
This Marathon is the E&P company, not the refiner (MPC). Another capex cut! Management said in the earnings release that investors should "expect 5% to 10% fewer net wells to sales in 2024 to deliver flat year-on-year total oil production as the Company optimizes well mix to maximize corporate returns and FCF generation." Very nice.

Also up about 8% after earnings, so the current market capitalization is $14 billion. They didn't publish a balance sheet with the Q4 release, but the enterprise value should be about $20 billion. During the fourth quarter of 2023, cash from operations was $1.1 billion and capital expenditures were $360 million for free cash flow of $681 million, a FCF yield on the enterprise value (annualized) of 13.6%. Shareholder returns during the fourth quarter (mostly repurchases) were $417 million, which is a shareholder yield of 12% (annualized). Their guidance for 2024 is $1.9 billion of free cash flow, assuming $75/bbl WTI and $2.50/MMBtu Henry Hub natural gas. That would be a 9.5% yield on the enterprise value.

Suncor Energy Inc. (SU)
The current market capitalization of SU (at a $33.50 share price) is $43.5 billion, and with $10 billion of net debt, the enterprise value is $54.5 billion. Cash from operations for the fourth quarter was $3.2 billion and the company spent $1.1 billion on capital expenditures. The resulting free cash flow for the quarter was $2.1 billion, which is a 15% yield (annualized) on the enterprise value. In the fourth quarter, Suncor returned $1.15 billion via repurchases, dividends, and debt repayment for an annualized shareholder yield of 10%. The fully diluted share count was down 3.5% y/y at the end of the year.

Upstream production was up 6% year over year to 808,100 barrels per day in the fourth quarter. Refinery utilization was 98% versus 94% the prior year quarter. Upstream capital expenditures were up 17% year-over-year, for a "production shortfall" of 11%. Oil sands "base" capex was up only 5% and production was up 10%, for a negative production shortfall. This is what we want to see from our slow decline oil sands with front loaded cost!

The oil sands segment generated funds from operations for the fourth quarter of $1.9 billion, with a production volume of 757 thousand barrels per day and an average crude price realization of $61/bbl. The refining and marketing segment generated funds from operations of $592 million, processing 456 thousand barrels per day and making a gross margin (LIFO) of $34.35 per barrel.

Texas Pacific Land Corporation (TPL)
The market capitalization of TPL (at $1,563 per share) is now $12 billion. The company has built up quite a cash pile during the shareholder activism dispute, so the current assets net of liabilities are $749 million and the enterprise value is $11.25 billion.

In the fourth quarter of 2023 (8-K), production volumes for TPL were 26,300 BOE per day, which was up 23% from the prior year. Oil volumes were up the same amount. This was the highest quarterly royalty production level in TPL history. Royalty revenue was up 2% thanks to the higher volumes, even though the price of oil was $78.46 versus $83.16 the prior year. Water sales, water royalties, and easement income were up 37% year-over-year, although the water service business has operating expenses, which were up.

Total expenses were $29 million (excluding depreciation) versus $25 million the prior year. Thankfully legal fees were only $3 million this quarter and not the gigantic $17 million we saw one quarter earlier this year during the heat of the shareholder activist battle.

Interesting to note that the expenses (again excluding depreciation) are a hefty 17% of total revenue. That's partly because TPL has established a "water services" business which is lower margin than collecting royalty revenue.

Operating income was $134 million for the quarter, and if you add back $3.9 million of depreciation, depletion, and amortization, you get a "cash flow-like number" of $138 million, which would be an annualized yield of 4.9% on the current enterprise value. (It was up 8.9% year-over-year.) For the full year, the company spent $100 million on dividends and $43 million on share repurchases. 

The share count shrank by only 0.33%; management let net current assets grow by $225 million during the year, to $818 million. That cash could have been used to shrink the share count an additional ~2% if it had been deployed at times when the share price was weak.

Black Stone Minerals LP (BSM)
Black Stone Minerals is another publicly traded minerals partnership. They had an IPO in 2015 although predecessor entities have been around much longer. They are bigger than Dorchester, with a market capitalization of $3.2 billion. Current assets net of all liabilities are $144 million and there is also $300 million of convertible preferred, making the enterprise value $3.4 billion. (The convertible preferred gets a quite expensive ten year yield plus 5.5% distribution rate, which is currently 9.8%.)

For the fourth quarter, BSM reported distributable cash flow of $119 million on total revenue of $191 million, which represents a yield of 15% on the market capitalization. Oil production was 1 million barrels and natural gas production was 16.5 bcf; production was therefore almost three quarters in terms of energetic equivalent BOEs. (But oil was a much greater percentage in terms of revenue.)

Something different about Black Stone compared with Dorchester is that they hedge their production. They have 570,000 barrels swapped for each quarter of 2024 at $71.45/bbl and 210,000 barrels swapped for each quarter of 2025 at $70.50 per barrel. That's about half of 2024 and a quarter of 2025 production hedged. For natural gas they have around 10 billion bcf swapped for each quarter of 2024 at $3.56 per bcf and 1 billion bcf for each quarter of 2025 at $3.65 per bcf. That's 60% of this year and a small proportion of next year.

Heading into 2023, they had swapped natural gas at $5/mcf, which obviously has supported the trailing distributions. Also noteworthy is that one of the big drillers on their Haynesville acreage (Aethon) is taking a "time out" on its drilling commitments due to low gas prices. So both volumes and prices will be lower in 2024, plus the preferred stock yield reset from 7% to 9.8% in November 2023, which will reduce income to common by a further $8.4 million per year.

Why hedge? Unlike Sitio, Black Stone does not have significant leverage. It sounds like they are bullish on natural gas over the longer term, once more LNG export capacity opens. Anyway, this is one to keep in mind if we were to get bullish on natural gas. A $5 natural gas price might give them an extra $125-150 million of earnings every year, which would be a decent boost to the current cash flow yield. (Of course, that would be assuming that management didn't bungle it with a hedging trade.)

Kimbell Royalty Partners LP (KRP)
One last publicly traded mineral partnership. Something interesting is that KRP is a limited partnership that has elected to be taxed as a corporation, so there is no K-1. There is a good bit of nepotism in the C suite to be aware of. Robert Ravnaas is the Chairman and CEO; David Ravnaas is the President and CFO, and there is also a Rand Ravnaas as VP of Business Development. KRP had its IPO in 2017 and has grown from acquisitions in 2018, 2019, 2022, and 2023.

Kimbell has a market capitalization of $1.5 billion. They have $269 million of net debt and $325 million of convertible preferred stock outstanding, for an enterprise value of $2.06 billion. Production in Q4 was 24k boe/d, coming mostly (55%) from the Permian and the Haynesville. Their recent investor presentation gives more guidance than other partnerships. They estimate that at $2 natural gas and $80 oil, their distribution (at a 75% payout ratio) would be $1.61, which would be a 10.4% yield on the current price.

Kimbell also hedges - they swapped about 140k bbl of oil and 1.3 bcf of natural gas for each quarter for the next two years (2024-2025) at prices ranging from $82-67/bbl for the oil and $3.52-$4.32/mcf for the natural gas. That is about a quarter of their oil and gas production levels.

As we mentioned in the past about Sitio, we are not big fans of borrowing (expensive capital) to buy mineral properties and then hedging the commodity price. It seems like the outcome that mainly delivers is scale. We can see how that would be important to insiders, though, since they get paid as a function of scale. The CEO of KRP was paid $5.2 million in 2023 and his son was paid $4.7 million. The CEO owns $17 million of common units and his son owns $11.7 million. 

Our humble opinion is that Dorchester has the simplest, cleanest model with the fewest moving parts, least promotional management, and longest track record.

Sprouts Farmers Market (SFM)
We wrote about Sprouts back in October 2023. At that point, the market capitalization was $4.3 billion and the enterprise value was $5.8 billion. Shares have been on a tear and the market capitalization is now $5.5 billion (+28%).

What we like about Sprouts is two things. First, the Sprouts stores are extremely well run and well merchandised, putting pressure on (and taking customers from) the tired old grocers that are owned by Kroger and Albertsons. Second, the business generates free cash flow even while expanding, which the company has been using to cannibalize its own shares. During 2023, Sprouts grew the share count by 21 net (5%) to 407 stores while shrinking the share count by 5.3%.  

For the full year 2023, Sprouts did $6.8 billion of sales (up 6.8% versus 2022) and generated $465 million of cash from operations (7% OCF conversion), spending $238 million on capital expenditures and an acquisition (compared with $265 million of depreciation and amortization), while paying off $125 million of debt, and repurchasing $203 million of stock.

As we said, the market capitalization is $5.5 billion and the enterprise value is $7 billion. That gives a FCF/EV yield of 3.2%. Reported net income per share (diluted) is $2.50 for the year, which gives a P/E ratio of 21.5x, and which was up 4.6% y/y. Management guidance is to open 35 new stores in 2024, with total revenue growth in the mid single digits.

Resurgence of Bubble

The U.S. has had three bubbles in 20 years: late 90s, 2005-2008, and the current one.

Each one has been bigger and crazier than the last.

Just the bear market bounce (April/May/June 2020) of this third bubble is crazier than any bubble before it:

Our correspondent @pdxsag (previously) writes in:

Today I had an epiphany that the markets — as they glory in their wanton, unchecked fraud — are now exhibiting the same dynamics as a crowd looking to riot.

As the Scholars Stage blog explained, riots are inherently a coordination problem. The same can be said for pump & dump schemes. If you consider investors as a motley crew of animal spirits, it would certainly stand to reason that at any point in time there exists a non-trivial number of investors that would gladly engage in blatant pump & dump stock manipulation. Their problem, of course, is how to coordinate. Like soccer hooligans looking for a riot, they need “an incident.”

If you’ve been dumb-founded by the stock runs in HTZ and CHK, it hopefully will make perfect sense when you realize that the bankruptcy filing is now the easily and universally understood “incident.” It’s akin to the sound of broken glass in a real riot. When a company files for bankruptcy protection pump & dump “entrepreneurs” quickly bid up the price to see if it "sticks.” If it’s not halted, if the exchanges and SEC make no effort to arrest the run then more traders jump on the stock driving the price higher still. Pretty soon it’s like a Macy’s being looted as hundreds of people are crashing into the stock looking to grab a quick buck and be gone. The daily volume when a stock is undergoing a viral pump & dump can be 10x of the float or more. Day traders, I suspect many of which are algos, are churning through blocks of shares not holding any individual shares for more than a few minutes at a time. Sure there is slippage with all that churn, but it’s important to not be caught holding the hot potato.

Another example of a now too obvious incident is the transparently fraudulent press release. In this market, where investors freely quip "Fraud is Alpha,” it stands to reason that a fraud-y press release is a clear signal from management to day traders that they are looking to play ball. Elon Musk has notoriously refined this to an art. In fact, today Tesla closed above $1000 for the first time ever on the back of a “leaked" email from Elon related to the development of the Tesla semi. The impetus has nothing to do with the business prospects of the semi, and everything to do with significant OTM call buying yesterday to get people’s attention and an incident today in the form of the leaked email.

We’ve seen similar incidents with various Covid vaccines news stories, press releases, and TV appearances by company CEO’s.

The markets are in one giant, late-stage pump and dump, and the regulators — like the police across many cities today — are overwhelmed and conspicuously enough to any bad actors looking for an easy looting, are standing-down.

King Aubrey

A correspondent writes in with observations about Aubrey's booth at the NAPE.

There it is in all its glory - the monument to Aubrey McClendon's new personal piggy bank "American Energy Partners" shaped, appropriately in the form of a huge crown sticking up 25 feet in the air - testament to a monster of an ego with a large "Welcome media and press" sign out front, which is honest, upright and fair given the fact that American Energy Partners has nothing to sell or promote other than King Aubrey himself. 

Hey! But I gotta give the devil his due. Aubrey really did do a terrific job aggressively gobbling up choice assets at Chesapeake which the bureaucrats who took over will now run at a profit. But we shall see if the bureaucrats can successfully replace those assets at a profit on down the road. But as to King Aubrey, the question is whether his aggressive acquisition streak was skillfully timed or just the lucky streak of a wild bull in a proverbial china shop. Only time, and his latest venture, "American Energy Capital Partners, L.P." which proposes to throw off a modest yield on top of its return of capital to investors after paying King Aubrey monster fees, will tell the final tale.

Aubrey's American Energy Partners Booth At the North American Prospect Expo in Denver Last Week

Mentioned in the previous post about Aubrey's new "fee machine".

On the ground at the expo, it looked like oil is near the top of the cycle. Private jet booths. Huge attendance with everyone bringing extraneous people just to get drunk and have fun.

A correspondent adds,

"I was in Houston the week before Thanksgiving and decided to stay an extra night, this was a Tuesday night. Started looking for a hotel on Sun night and all the 3 and 4 star hotels in the city were sold out. That in itself is probably an indication of a top in energy."

"McClendon’s New Fee Machine"

This is amusing/astonishing: Did the ex-Chesapeake CEO ring the bell at the MLP top?

The S-1 also makes it clear that AECP will pay ENORMOUS fees to the general partner (ARC) and Manager (McClendon). You’ve been warned — the word “fee(s)” appears 379 times in the S-1.

If the full $2 billion is raised, ARC will pocket ~$200 million in offering fees and commissions. The management fee to McClendon will be ~$70 million per year initially, and increase over time. The partnership will also reimburse ARC and McClendon for certain G&A expenses.

Then the M&A fees… ARC and McClendon will collect fees up to 3.0% of any acquisition contract price and 1.0% of any disposition contract price, including the reimbursement of G&A expenses associated with the transactions. There’s also a financing fee, such that the partnership will pay ARC and McClendon 0.75% of the principle amount raised, including draws on a credit facility.

A correspondent writes,

"I wouldn't pay Henry Singleton those kind of fees"

Here's a link to the S-1 filing.

Aubrey/AECP had the biggest booth at the North American Prospect Expo in Denver last week.

Aubrey Has Been Fired? ($CHK)

Wow:

"Aubrey K. McClendon, has agreed to retire from the company on April 1, 2013 and will continue to serve as Chief Executive Officer until his successor is appointed."

Stock loves it, up 10 percent after hours.

"Chesapeake Energy Corporation Announces Agreement to Sell a Substantial Majority of Its Remaining Midstream Assets for $2.16 Billion" ($CHK)

Just announced after hours, Chesapeake Energy Corporation Announces Agreement to Sell a Substantial Majority of Its Remaining Midstream Assets for $2.16 Billion. A Credit Bubble Stocks correspondent writes,

"A lot of hay has been made (on the short side) that CHK still doesn't even have a purchase and sale agreement for its remaining midstream assets.

They now have one in place, to sell $2.16 billion worth of their midstream assets to GIP in a transaction expected to close this year. They also have sold $175 million worth to other entities in the quarter and expect to sell the remaining $425 million worth by the end of Q1 2013.

This basically completes the midstream sale, which will now fetch $2.75 billion instead of the original $3 billion amount (par for the course here). I think the market was expecting a worse outcome and this is certainly good news."

The Chesapeake convertible preferred that I have mentioned ad nauseam has fallen again and is now yielding 6.5%.

A better investment than, say, a triple-net lease big box store with a cap rate of 4% and a tenant that's trying to make a go of it selling cell phones.

Chesapeake Director Buys $4.5 Million in Stock ($CHK)

From a new Form 4 filing - purchased on Monday for $16.92.

Poses is one of the new directors who was added this summer.

Meanwhile, the pref is on sale again. Now yielding 6.7%. 

What Does Exxon Mobil's Acquisition of Celtic Exploration Mean for Chesapeake ($CHK)

A Credit Bubble Stocks correspondent writes in about Exxon Mobil's acquisition of Canadian E&P Celtic Exploration, and what it means for Chesapeake,

"Exxon is paying prices that would value CHK’s Marcellus at $7.8-9 billion if it was in Western Canada! This is double where the market is valuing these assets, and within ~25% of my values. This is very bullish for CHK’s value and shows that the market is still in line with my valuation. In addition, the smartest guys in the room are still buying large assets. While Western Canada is attractive for the potential to export LNG – no one has started construction of a plant, much less the long pipeline through “first nations” territory to feed the LNG train. It will take tens of billions in infrastructure and years before realizations and costs in Western Canada even get to the (better on both counts) levels in the Marcellus.

CHK is paying down a lot of their debt this month (they are receiving proceeds of their $6.9 billion of sales this month) [and is] also going to be in much better financial shape when they report earnings November 2nd, and I expect they will lower future capex. They are also shopping more tier-2 assets than anyone realizes, and could be debt free if they wanted by the end of 2013 if they wanted to. The market doesn’t know how to model CHK right now, even though things are clearly a lot better. When the company provides hard numbers, I expect the market (and the shorts) will take notice."

I still like the Chesapeake Energy preferred, yielding 6% with a conversion option.

Natural Gas Rally ($CHK, $CHKDG, $PTEQP)

The breakout in natural gas prices continues - almost the entire curve is now above $4, with the front month contracts at their highest prices since December 2011.

The CHKDG (Chesapeake preferred) is stuck around 82 - I think par would be a fair price at this point, which would be 22% higher. I'm happy to collect the 6.1% yield until that point. Similar story with the PTQEP pref.

Barron's: "Will Chesapeake Asset Sales Reenergize Stock?" ($CHK)

"We think shares should outperform in the near-term on this morning's asset sale news," said Sterne, Agee & Leach analyst Tim Rezvan. "The company is delivering on asset sale guidance provided earlier this year. The size of the sales and the quality of the counterparties confirm the quality of the embedded assets in Chesapeake's portfolio."

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.

Are the Chesapeake Energy Pipeline Commitments Really a Liability, or an Asset? ($CHK)

A Credit Bubble Stocks correspondent writes in,

EGO – the best in class liquids shale producer – just reported their Q2. Of their growing oil production from shale they proudly proclaim: 'In addition, we are uniquely positioned to market a significant portion of this crude oil at robust Brent-type pricing through our own rail offloading facility at St. James, Louisiana, and to reach the Houston Gulf Coast market via the recently completed Enterprise Eagle Ford pipeline.'

Their St. James facility is an rail terminal and storage facility, EOG can ship their Bakken crude there (at some cost) and get close to a Brent price. The Enterprise Eagle Ford pipeline accomplished the same goal much more economically, allowing them to pipe oil directly from the Eagle Ford Shale into the Houston Ship Channel (via Enterprise’ El Rancho pipeline from Sealy). This is great news for EOG, because gulf coast crude competes with seaborn Brent, and trades at the same price. EOG was the anchor tenant in Phase I of this pipeline.

Chesapeake’s Eagle Ford position is basically just to the West of EOG where Phase II of the pipeline is headed (estimated online date is Q1 2013). Phase 1 has a 350,000 bbl per day capacity and, like EOG, CHK will be making use of some of it. The smaller Phase II extension has capacity of only 200k barrels per day. Those producers using this capacity when it comes online will be selling their crude into a direct pipeline to Brent pricing. Those who don’t will be trucking their crude 325 miles on roads that weren’t built to handle the traffic.

Tanker trucks can carry about 170 barrels of crude, and must be driven back empty, for a roundtrip of 650 miles at a cost of $12 per bbl, as compared to an assumed cost of $2-3 per bbl to ship it via pipeline. This is a huge $10 per bbl differential, which will dramatically change the economics of the field for the haves and have-nots. The acreage of the 'haves; will be implicitly worth more, which is important to note, because Chesapeake is the anchor tenant of Phase II and has contracted for half the capacity for the first ten years.

This is one of the pipeline commitments that shows up in their 10K as billions in undiscounted future obligations, which some analysts have called off balance sheet liabilities. If CHK has locked up half the pipeline at a preferential rate, and others will have to competitively bid for the rest of the capacity at higher rates, or truck their oil at much higher prices, is this as asset or a liability? $3 per bbl for ten years would make this agreement a 'liability' of $1.1 billion dollars in CHK’s 10K. However, if other shippers are paying $1.50 extra for the same pipeline (or more) isn’t this actually a large off-balance sheet asset?

[Also]: BHP just announced a $2.84 billion write-down of the Fayetteville shale asset they bought from CHK for $4.75 billion a little over a year ago. While Chesapeake didn’t have their gas production 'hedged' going into this year, they did sell this dry gas asset for at least $2.8 billion more than it is worth today. This was Chesapeake’s worst dry gas asset, and the proceeds were used to fund their purchase of the Utica Shale, on which they reaped a 500% gain selling a portion to Total.

Southeastern / Longleaf Letter Regarding Chesapeake ($CHK)

Southeastern is the largest holder of CHK. See their discussion of the investment on p2 of the longleaf partners letter [pdf] they just put out:

"Almost all of what was reported was previously known, but the rapid onslaught of stories blurred the lines between perception and reality.

Throughout the controversy, nobody has questioned the quality of the company’s assets. McClendon has done an excellent job building a portfolio of some of the best oil and gas acreage in the U.S. at attractive prices. [...] Also ignored in the criticism is that in 2011, McClendon was recognized as one of only eight public company CEOs who have been in place for over two decades and have earned a 20%+ yearly return for shareholders over that time."

I posted a few weeks ago the calculation showing that from 1993-2013, Chesapeake's cashflow from operations (CFO) will have grown at a compound rate of 43%, and CFO per share will have grown at a compound rate of 20%.

Chesapeake Short Interest ($CHK)

A correspondent writes in:

Down to 85.8 million shares:
Recent short interest history (with stock price in parenthesis)
April 30 – 67.2MM ($18.44)
May 15 – 85.2MM ($14.65)
May 31 – 94.5MM ($16.90)
June 15 – 90.1MM ($18.10)
June 30 – 85.8MM ($18.60)

What happens if the shorts start to think a buyout is on the table? What are the odds the board announces they are looking at strategic alternatives when they report Q2? What are the odds anyone cares if they do?

This is a horrible short idea. One of the most important things to avoid in a short idea is a company that is a buyout target. The nice thing about shorting a company with distressed bonds is you know that any acquirer would look to take control buy buying the bonds instead of the stock.

New Board at Chesapeake ($CHK) Announced Today

Unusually for a Chris Helman Forbes article, this is a pretty good summary of the new Chesapeake board and the implications of the choices.

"[New director] Frederic Poses is the former CEO of American Standard, later renamed Trane. Poses swept into American Standard in 2000, cut deadwood, closed a plant, paid down debt, instituted Six Sigma and sold the company to Ingersoll-Rand in 2007 for $10 billion.
[...]
If you’re paying attention to these bios, you’ll notice that Dunham, Alexander, Martin and Poses all have experience in buying and selling large corporations. Could that be a sign of things to come at Chesapeake?"

Also worth reading is the company press release on the new directors. I think everyone should be pretty satisfied by this. Does anyone think that the former Chairman of ConocoPhillips and former Chief Executive Officer of Conoco has agreed to become the chairman of a "fraud"?

Natural gas for September 2012 is back to where it was in mid-March, when CHK was at $25. The panicky "natural gas is going to $0", "CHK is bankrupt", and "CHK is a fraud" ideas seem to be off the table. When my phone rings, I keep thinking it's the LBO announcement.

"Southeastern's Hawkins says Chesapeake undervalued" ($CHK)

"Depressed shares of Chesapeake Energy Corp are worth more than $50 a piece, and will eventually top $100, the head of Southeastern Asset Management, its top shareholder, said on Thursday."

Chesapeake Energy ($CHK) Since 1993

A correspondent writes in (edited for clarity):

"In CHK’s first year public they had $3.905 million in cash flow from operations and a fully diluted share count of 24.183 million shares. In 2013 (which I think is a normalized year), they will have $4.85 billion in cash flow from operations at the midpoint of guidance. Assuming all preferreds convert, the fully diluted share count is 769 million.

This means that from 1993-2013, shares outstanding will have grown at a compound rate of 19%, but cashflow from operations (CFO) will have grown at a compound rate of 43%, and CFO per share will have grown at a compound rate of 20%. Meanwhile, the price per share has gone up at a compound rate of only 13.5% from the IPO to the present."

The Chesapeake Hogshooter Well ($CHK)

A correspondent writes in with thoughts about the CHK "Hogshooter" well results:

"If that 'hogshooter well' averages 3,500 bbl per day of oil this year (@$75 per bbl), it will have cashflow of $96 million dollars. Even assuming 5% severance tax and 20% royalty, the IRR on this well looks to be around 1,000% assuming $10 million well cost (assuming the well has an NPV of 1.4 times net first year cashflow).

Even if they only have 65 more wells like that (and they are only half as good), the NPV is $40 million per well, or $2.6 billion. This calculation doesn’t mean much with so little info . . . but I think it does show that this little area could be worth $1 billion rather than $100 million"

Barron's: "Chesapeake Jumps on Report It Will Sell Pipeline Business"

Chesapeake Energy (CHK) surged 6.7% in late trading on news from Bloomberg that the natural gas and oil producer is in talks with infrastructure fund management company Global Infrastructure Partners to sell its pipeline arm, Chesapeake Midstream Partners LP, for $4 billion.