"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.

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.

Chesapeake Preferred ($CHK $CHKDG) - Still Cheap

I was thinking about buying more of the CHK pref today. It's offered at 74, while the NYSE listed one CHK-D (with a lower coupon and higher conversion price) is trading at 81. To be equivalent on a yield basis, ours should be trading at ~90.

So, ours is just very visibly underpriced by 22%. Not counting that the company will probably get taken over relatively soon with pref holders receiving at least par (optionality on even higher upside). Meanwhile, there isn't any credit risk that we can see.

NG Up; CHK Down

The front month natural gas contracts were up roughly 5 percent today, with good performance across the entire curve. Tomorrow is the weekly natural gas storage report and people seem to be expecting more bullish data.

The futures prices are roughly back to their levels from February this year, before the complete absence of winter set off a market panic. June gas is 2.62 and December gas 3.43. CHK was at ~$25 last time gas was at these prices.

Social Mood Theory: Natural Gas Rig Count Hits New 10-Year Low, Prices Begin to Rise, as Most Visible Name in Industry Gets Crushed

"The number of rigs drilling for natural gas in the United States fell this week to the lowest level in 10 years [...], sliding by eight this week to 598, the lowest since April 2002 when there were 591 rigs operating, data from Houston-based oil services firm Baker Hughes showed on Friday. If in coming weeks the count drops to 590 or lower, gas-directed drilling would be at its lowest in 12-1/2 years, or since October 1999."

This is awesome. At the same time, a bunch of journalism majors have ginned up a scare campaign against Chesapeake so that you can buy in at a fraction of net asset value.

This is another example of real world events that are brilliantly predicted by social mood theory. The natural gas storage situation has been improving, as weekly injections are smaller than in past years. Meanwhile, prices have bounced significantly as the June contract has jumped 25% in a month. (It's possible that fundamentals have already turned around, although this is unknowable and a question that doesn't need to be answered, anyway.)

The point is that even as the gas fundamentals were improving we saw an onslaught of negativity about, and selling of, the most visible, aggressive, and controversial name in natural gas. There were days when Reuters, the NYT, and the WSJ each ran multiple stories about dated and relatively inconsequential aspects of CHK corporate governance.

It's classic social mood stuff. Does buying natural gas assets become more or less risky as the share price falls while the price of natural gas goes up? How big of a discount should there be for having a CEO who is a jerk? Isn't that something that activist investing could solve?

How did a compensation scheme that had been consistently disclosed, and which is relatively tax efficient and incentive aligning, become front page news for two weeks? Since when do arcane governance and compensation issues constitute anything but bland articles for p7 of the business section?

Also, the CHKDG has gotten more attractive. On Friday, it was yielding 7.6% and convertible at a share price equivalent to roughly 25. There is still around $10 billion of market capitalization junior to it.

After Declines, Cheseapeake Equity ($CHK) Now a Screaming Buy

"With projected asset monetization of $10bn - $12bn, the implication is that combined cash and asset sales in 2012 exceed the current fully diluted market capitalization of the company."

I am almost never bullish on equities; buyers of stock are usually chumps. But I have never seen a case where the bears were so wrong.

More on this later.

Limits to Arbitrgage: The Dual Chesapeake Preferreds, Part II

I did a post a few weeks ago about a market inefficiency that can't be directly arbitraged: the price discrepancy between the two Chesapeake Energy convertible preferreds. If you are curious, the company has a PDF on their website with more detailed information about the various preferreds.

The NYSE listed preferred CHK-D is trading at 95.73 today. Just to be at yield parity, and ignoring the fact that conversion parity favors CHKDG, the CHKDG should be trading at (5/4.5)*95.73 = $106.36.

So, that is 23% upside from the current level just to be at yield parity!

Also, the last time that the CHK-D traded at this level was on Nov 4. The CHKDG was trading above 90 at that point.

I own the CHKDG, as it is attractive on both a fundamentals basis and incredibly cheap compared to its more liquid counterpart.

Limits to Arbitrgage: The Dual Chesapeake Preferreds

Here is a market inefficiency for you. Chesapeake Energy has two different publicly traded preferred stocks, both with a face value of $100, and both cumulative and convertible.

• The 4.5% coupon, which is listed on the NYSE, has a conversion price of $43.91.
• The 5% coupon trades on the pink sheets and has a conversion price of $38.81.

The second preferred has a higher coupon and a lower conversion price. You'd expect it to trade at a higher price than the first one, right?

Wrong. The lower-yielding, NYSE-listed preferred trades at roughly $90, which is a yield of 5 percent and a conversion parity of $39.52. The second preferred trades at around $80, which is a yield of 6.25% and a much lower conversion parity of $31.

There should be a total layup arbitrage here: buying the second one at a yield of 625 and shorting the first one at a yield of 500, and pocketing a 125bp yield spread plus a huge conversion premium. Except I cannot locate the NYSE listed one to short: a limit to arbitrage.

By definition, anyone who owns the first one is totally asleep at the switch. They could buy an equivalent security that yields more and has a much more attractive conversion feature.

[Note: Assuming the NYSE-listed pref is trading at the correct price and yield, the pink sheet pref should be trading at par, not 80!]

Chesapeake Energy's Bullish Case for Natural Gas ($CHK)

In their November 2011 investor presentation, Chesapeake Energy offered "many reasons to be bullish on intermediate and long-term natural gas prices." (p13)

• "U.S. natural gas producers are rapidly moving to an oilier production base." Natural gas production in the U.S. increased about 28 percent over the past decade. Nearly half of this growth came from CHK alone. However, CHK continues to reduce drilling of natural gas wells, except where required to hold leases or use drilling carries. In 2012 and 2013, CHK plans to spend ~75 percent of capital expenditures drilling in liquid-rich plays.
• CHK argues that the shift to liquid-rich wells will occur industry wide, as producers convert to drilling wells that produce $10-17/mcfe, and finish drilling enough wells to hold their shale gas shale leases. Once that conversion happens, it may take much more than "4,5,6, or 7" dollars per mcf to incentivise the industry to drill gas wells again. And the shale gas output has steep decline curves!
• "Conversion of U.S. liquefaction import facilities to LNG export facilities." For example, the Sabine Pass LNG terminal, owned by Cheniere in Lousiana.
• "Growing industrial demand: U.S. natural gas prices are lowest in the industrialized world and well below oil-based naphtha prices."
• "Shift from coal to natural gas for U.S. electrical generation." Right now, lots of utilities are making decisions about whether to replace obsolete coal plants with more coal or natural gas. Low prices are encouraging the use of natural gas.
• Construction of gas-to-liquid (GTL) plants. This is very cool - you can make a barrel of gasoline with natural gas feedstock, and at the current crude oil:natural gas ratio, it is incredibly profitable. Buffett should be buying CHK and building GTL plaints. South African company Sasol is building a plant in Louisiana.
• CNG and LNG vehicles. CHK has made a small investment in LNG fueling infrastructure for trucks along interstate highways. Focusing on trucking is a very clever way of bootstrapping to solve the chicken-egg problem in fueling infrastructure. According to CHK, the "8 million American heavy duty trucks consume ~3 million barrels of diesel every day, that’s equivalent to >6 tcf of incremental natural gas demand per year." If fully converted to natural gas, that would be 16 bcf/d of incremental demand, compared to only 10 bcf/d of incremental natural gas supply in the U.S. between 2000 and 2011!

This is a pretty good supply/demand situation. Things look grim and the price is low, but there are imminent catalysts that will decrease supply and increase demand. By buying the convertible preferred stocks, we get paid to wait.

Why would you buy a noncumulative preferred stock in a European bank when you could buy a convertible preferred stock with safety and a free call option on natural gas? It takes all kinds...

Chesapeake Energy (CHK) and the Utica Shale

Fixed some typos, replaces the earlier version from last night.

After building a huge position in the Utica shale over the last year (to the initial consternation of shareholders), Chesapeake finally announced a monetization deal in this Eastern Ohio play on November 3rd. Rather than selling 25-35% of their Utica position in the form of a joint venture - as Chesapeake had done in five previous shale plays and as the market was expecting - Chesapeake announced two smaller transactions. Chesapeake placed their "wet gas" Utica acreage (like the Eagle Ford shale, the Utica has a "dry gas", "wet gas" and oil window) into a non-recourse subsidiary called CHK Utica LLC. They sold $1.25 billion of 7% perpetual (callable at a 10% IRR to the buyer) preferred shares in this subsidiary, which also receive a 3% royalty on the first 1,500 wells drilled in this area. Chesapeake also signed a letter of intent to sell 25% of this same "wet gas" acreage for $2.14 billion in a traditional joint venture with an "undisclosed major international energy company". CHK shares traded up overnight on this announcement of a "$3.4 billion monetization", but traded off the next day on disappointment that only $500 million of the total $1.25 billion preferred issue had been sold and that the joint venture was only in the letter of intent stage.

Since then CHK Director Lou Simpson (of Geico fame) purchased 100,000 shares at $26.69, CHK closed the rest of the of the preferred issue, receiving an additional $750 million, and the stock has continued trading down to $23.72 per share. The stock is off 18% since the November 3rd announcement and is trading roughly where it was one year ago before the Utica was discovered, leased up and partially monetized. Clearly the market is disappointed in the size and structure of this transaction as well as the fact that the joint venture has not been closed and the partner not named. Chesapeake has never failed to close a deal or turn a letter of intent into a deal before, but the market is clearly concerned given CHK's large capex plans for 2012 which will exceed free cash flow. The company has publicly and privately said that they have not and will not consider abandoning their plans to reduce net debt in 2012 (as part of their 30/25 plan) and this has added to the uncertainty surrounding their 2012 funding.

There are two possible explanations here. That market has apparently decided that Chesapeake was unable to get a bigger deal done in the Utica (or one at all so far), may come up short in funding their huge discretionary capex plans in 2012, and is stubbornly refusing to give up on their debt reduction plans - all of which suggest a cash crunch. An interesting corollary of the market's view is that the rest of CHK's Utica shale is likely worthless. This is interesting for a number of reasons, not the least of which is that the majority of Chesapeake's other 725,000 Utica acres not included in the above deal (they have 1.375 million total acres in the play) are in the oil window to the West. Not only does CHK continue to lease and take out drilling permits in the oil window, but so does Exxon, Devon and Anadarko along with smaller companies.

A quick word on valuation: the already announced transactions only concern "CHK Utica LLC" which is in the wet gas window. Assuming the joint venture closes, the unnamed energy company: will have paid a discounted price of $1.95 billion (discounting the future drilling carries at 10%) for 25% of this portion of the play. This recoups Chesapeake’s entire cost in the play and implies a retained value of almost $6 billion dollars or about $9 per share. This ignores the non-recourse preferred shares and assumes the rest of the Utica is worthless. Considering the other companies involved and that activity is ramping up I think this is a baseline value.

There haven't been any well results out of the oil window yet and so it makes sense why CHK would be unable or unwilling to do a joint venture in that part of the play yet. CHK's junior partner in the Utica is Enervest and their publicly traded MLP EV Energy Partners (EVEP). Enervest/EVEP had a lot of land in Eastern Ohio prior to the discovery of the Utica so CHK partnered with them. As part of EVEP's deal with Chesapeake, the larger company shares all information with them. John Walker, EVEP's well respected CEO made some interesting comments at a Wells Fargo conference last week that I think have big implications for CHK:

"We are pleased to be a partner with CHK, I think you’ll find out more later this month about who the JV partner is and more about the terms of the deal. $15,000 an acre, I think, is a base price. We think the price is gonna get much better in the oil window."

This is significant because Walker has seen all of CHK's information from the oil window and is participating with Chesapeake in a number of wells being drilled there currently. His company, EVEP, is planning to open a data room on their oil window Utica acreage in Q2 of next year to either sell the acreage or do an asset swap. For this reason, I don't think he has any reason to be promotional - by the time his company does anything with their acreage everyone will know what the oil window is worth. Walker clearly is very confident from what he has seen and would rather wait for well results (which he is privy to), than sell into the current hype and already high prices.

The market is saying the oil window is worthless, that CHK has a 2012 funding problem, and that they are stubborn and reckless to hold onto their debt reduction plans. Might Chesapeake have an ace up their sleeve? From Walker's comments it sounds like acreage in the oil window could be worth more than the $13,700 per acre in present value that CHK and EVEP received for the acreage they sold in the wet gas window. This would mean another $9+ billion in value to CHK (~$15 per share) and potentially billions more in cash in the door in 2012 from a new Utica joint venture.

A quick note about the pending joint venture. The French oil major, Total, previously bought into Chesapeake's Barnett shale in Texas. Total publicly said that they want to buy into the Utica shale and both CHK and TOT will not deny (nor confirm) that Total is the joint venture partner. Interestingly, CHK did deny that Reliance was the joint venture partner. Also, in Chesapeake's latest 10Q it was disclosed that Total is accelerating next year's drilling carry payments to CHK (at a 10% discount) for the Barnett shale and allowing them to lower the amount of rigs they must keep active there. Basically, rather than pay for most of Chesapeake's drilling in the Barnett next year, Total handed them $500 million in cash in October and told them they didn't need to drill as much. This is good business on Total's part because gas prices are low, but it is also very helpful to CHK and puts less stress on the company to do a premature deal in the oil window of the Utica. If Total is not the joint venture partner in the wet gas window (and I think contemplating a deal in the oil window when there is more information on it) the company is sure making a lot of statements to suggest it is them for some unknown reason.

I think the logical conclusion from all of this is that not only will the "Utica joint venture" close, but that it will turn out to be the first Utica joint venture for CHK. Either way, just closing this first deal (expected by the end of December) will have created $9 per share of value for CHK. From where I'm standing, there is a lot of circumstantial evidence that there is another $15 per share in value to be had in the oil window.

A Contributor Writes in About Chesapeake Energy (CHK)

A Credit Bubble Stocks contributor writes in with thoughts about Chesapeake Energy.

After building a huge position in the Utica shale over the last year (to the initial consternation of shareholders), Chesapeake finally announced a monetization deal in this Eastern Ohio play on November 3rd. Rather than selling 25-35% of their Utica position in the form of a joint venture - as Chesapeake had done in five previous shale plays and as the market was expecting - Chesapeake announced two smaller transactions. Chesapeake placed their "wet gas" Utica acreage (like the Eagle Ford shale, the Utica has a "dry gas", "wet gas" and oil window) into a non-recourse subsidiary called CHK Utica LLC. They sold $1.25 billion of 7% perpetual (callable at a 10% IRR to the buyer) preferred shares in this subsidiary, which also recieve a 3% royalty on the first 1,500 wells drilled in this area. Chesapeake also signed a letter of intent to sell 25% of this same "wet gas" acreage for $2.14 billion in a traditional joint venture with an "undisclosed major international energy company". CHK shares traded up overnight on this announcement of a "$3.4 billion monetization", but traded off the next day on dissapointment that only $500 million of the total $1.25 billion preferred issue had been sold and that the joint venture was only in the letter of intent stage.

Since then CHK Director Lou Simpson (of Geico fame) purchased 100,000 shares at $26.69, CHK closed the rest of the of the preferred issue, recieving an additional $750 million, and the stock has continued trading down to $23.72 per share. The stock is off 18% since the November 3rd announcement and is trading roughly where it was one year ago before the Utica was discovered, leased up and partially monetized. Clearly the market is dissapointed in the size and structure of this transaction as well as the fact that the joint venture has not been closed and the partner not named. Chesapeake has never failed to close a deal or turn a letter of intent into a deal before, but the market is clearly concerned given CHK's large capex plans for 2012 which will exceed free cash flow. The company has publicly and privately said that they have not and will not consider abandoning their plans to reduce net debt in 2012 (as part of their 30/25 plan) and this has added to the uncertainty surrounding their 2012 funding.

There are two possible explanations here. That market has apparently decided that Chesapeake was unable to get a bigger deal done in the Utica (or one at all so far), may come up short in funding their huge discretionary capex plans in 2012, and is stubbornly refusing to give up on their debt reduction plans - all of which suggest a cash crunch. An interesting corrollary of the market's view is that the rest of CHK's Utica shale is likely worthless. This is interesting for a number of reasons, not the least of which is that the majority of Chesapeake's other 725,000 Utica acres not included in the above deal (they have 1.375 million total acres in the play) are in the oil window to the West. Not only does CHK continue to lease and take out drilling permits in the oil window, but so does Exxon, Devon and Anadarko along with smaller companies.

A quick word on valuation: the already announced transactions only concern "CHK Utica" which is in the wet gas window. Assuming the joint venture closes, the :unnamed energy company: will have paid a discounted price of $1.95 billion (discounting the future drilling carries at 10%) for 25% of of this portion of the play. This recoups Chesapeakes entire cost in the play and implies a retained value of almost $6 billion dollars or about $9 per share. This ignores the non-recourse preferred shares and assumes the rest of the utica is worthless. Considering the other companies involved and that activity is ramping up I think this is a baseline value.

There haven't been any well results out of the oil window yet and so it makes sense why CHK would be unable or unwilling to do a joint venture in that part of the play yet. CHK's junior partner in the Utica is Enervest and their publicly traded MLP EV Energy Partners (EVEP). Enervest/EVEP had a lot of land in Eastern Ohio prior to the discovery of the Utica so CHK partnered with them. As part of EVEP's deal with Chesapeake, the larger company shares all information with them. John Walker, EVEP's well respected CEO made some interesting comments at a Wells Fargo conference last week that I think have big implications for CHK:

"We are pleased to be a partner with CHK, I think you’ll find out more later this month about who the JV partner is and more about the terms of the deal. $15,000 an acre, I think, is a base price. We think the price is gonna get much better in the oil window."

This is significant because Walker has seen all of CHK's information from the oil window and is participating with Chesapeake in a number of wells being drilled there currently. His company, EVEP, is planning to open a data room on their oil window Utica acreage in Q2 of next year to either sell the acreage or do an asset swap. For this reason, I don't think he has any reason to be promotional - by the time his company does anything with their acreage everyone will know what the oil window is worth. Walker clearly is very confident from what he has seen and would rather wait for well results (which he is privy to), than sell into the current hype and already high prices.

The market is saying the oil window is worthless, that CHK has a 2012 funding problem, and that they are stubborn and reckless to hold onto their debt reduction plans. Might Chesapeake have an ace up there sleave? From Walker's comments it sounds like acreage in the oil window could be worth more than the $13,700 per acre in present value that CHK and EVEP recieved for the acreage they sold in the wet gas window. This would mean another $9+ billion in value to CHK (~$15 per share) and potentially billions more in cash in the door in 2012 from a new Utica joint venture.

A quick note about the pending joint venture. The French oil major, Total, previously bought into Chesapeake's Barnett shale in Texas. Total publicly said that they want to buy into the Utica shale and both CHK and TOT will not deny (nor confirm) that Total is the joint venture partner. Interestingly, CHK did deny that Reliance was the joint venture partner. Also, in Chesapeake's latest 10Q it was disclosed that Total is accelerating next year's drilling carry payments to CHK (at a 10% discount) for the Barnett shale and allowing them to lower the amount of rigs they must keep active there. Basically, rather than pay for most of Chesapeake's drilling in the Barnett next year, Total handed them $500 million in cash in October and told them they didn't need to drill as much. This is good business on Total's part because gas prices are low, but it is also very helpful to CHK and puts less stress on the company to do a premature deal in the oil window of the Utica. If Total is not the joint venture partner in the wet gas window (and I think contemplating a deal in the oil window when there is more information on it) the company is sure making a lot of statements to suggest it is them for some unknown reason.

I think the logical conclusion from all of this is that not only will the "utica joint venture" close, but that it will turn out to be the first Utica joint venture for CHK. Either way, just closing this first deal (expected by the end of December) will have created $9 per share of value for CHK. From where I'm standing, there is a lot of circumstancial evidence that there is another $15 per share in value to be had in the oil window.

Chesapeake Energy Developments (CHK)

Chesapeake Energy (CHK) announced earnings after-hours on Thursday, and it seemed like people (sell side equity research people at least) were unhappy that the company took its natural gas hedges off and that it is spending more money buying land. When it comes to Chesapeake land purchases, you need to think about their track record. This is how CEO Aubrey McClendon described it on the conference call [transcript]:

If you are keeping track, this new JV would make our seventh. We started with the Haynesville in July of 2008, and in the 3 years since then, we have also brought in partners on the Fayetteville, Marcellus, Barnett, Eagle Ford, Niobrara and now into 1 phase of the Utica play.

In these 7 JV areas, the company initially acquired approximately 5.1 million net leasehold acres at a cost of $11.1 billion. That's around $2,200 per net acre overall on average. We then sold 1.5 million of those acres for total consideration of $16.4 billion in cash and carries, meaning we recovered 150% of our total leasehold costs in all the plays combined, while leaving ourselves with 3.6 million net acres in 7 of the nation's very best plays, at a negative leasehold cost of $5.3 billion.

That's about a negative $1,500 per net acre. I really don't think the magnitude or significance of what we have accomplished by owning 3.6 million net acres at a profit of $1,500 per net acre has been fully appreciated. It is quite simply unprecedented in our industry.

Add in the fact that they have $8 billion in hedging gains since 2006 (see page 28 of the latest investor relations presentation). They have an information edge and they mint money. The significance of Chesapeake covering its natural gas hedges was completely missed by the market. More color from Aubrey:

Chesapeake single-handedly has generated almost half of the entire industry's growth in natural gas production. Said another way, a 2% gas market share company in 2000, which was us, grew its production 472% over the past decade, while the other 98% of the industry, 49x bigger than us and represented by more than 10,000 other companies, only grew its collective production 12% during the past decade.

As incredible as that is, it's even more incredible how most natural gas market observers fail to understand the impact of these numbers on future supply demand trends, because for the next 5 years, Chesapeake is planning to keep its gas production essentially flat. Please see Slide 18, which shows our projected annual 10% production increases coming almost entirely from liquids production growth from 2012 through 2015.

Said in the simplest way that I can, natural gas markets during the past 5 years were basically changed single-handedly by the efforts of 1 company. And now I'm telling you, during the next 5 years, it will be very different from now. And the futures curve is currently pricing natural gas, we believe, incorrectly because the same company that helped bring you the gas oversupply is now dedicated to increasing its liquids production, and its gas production will not increase much from here.

Imagine if Aubrey just adopted the Warren Buffett strategy of having a girlfriend who owns a newspaper so you get good press.

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.

An Inflation-Agnostic Trade: Chesapeake (CHK) Preferred Stock (CHKDG)

Sometimes when I mention natural gas, it is simply as a thought experiment: why buy silver if there are other commodities that would do better under almost any conceivable scenario?

I am not buying NG futures, but I have a clever idea that I think is even better. Chesapeake Energy (CHK) is the 2nd largest producer of natural gas in the US. I have seen a variety of sum-of-the-parts analyses of CHK that suggest the real value is twice as high as the current share price. Wall Street hates the company and the CEO Aubrey McClendon.

It has a convertible preferred stock (CHKDG) with a 4.6% yield that can optionally be converted into CHK stock at $44.

Chesapeake Energy Corp., 4.50% Cumulative Convertible Preferred Stock, liquidation preference $100 per share, not redeemable at the issuer's option at any time, and with no stated maturity. Distributions of 4.50% ($4.50) per annum paid quarterly... The preferred shares are convertible any time at the holder's option into an initial 2.2639 common shares of CHK, an initial conversion price of $44.172 per common share (now 2.2727 at $43.9998) . On or after 9/15/2010, if the price of the common stock exceeds 130% of the conversion price for 20 of any 30 consecutive trading days, the company may, at their option, force the preferred shares to be converted into common shares at the then prevailing conversion price. In regards to payment of dividends and upon liquidation, the preferred shares rank equally with other preferreds and senior to the common shares of the company. 

I consider it "inflation agnostic"; if NG prices stay the same, we get a nice yield, and if NG prices increase we would get the benefit of a higher CHK share price.