Friday, January 6, 2012

Sell Side Research and Chesapeake Energy ($CHK)

From a Credit Bubble Stocks correspondent:

"[Investment Bank X] values the company based on a multiple of cashflow and as compared to its 'large cap peers.' This means they are valuing it the way you would value a no-growth company like Exxon. Because CHK is the largest shale company they have bumped it up into the large cap universe.' The smaller shale companies (mid-cap E&P companies) trade for double CHK’s valuation on an earnings and cashflow basis.

"Much more importantly, this valuation ignores the value of their assets. [They] admit as much, and the analyst writes under 'valuation' that their price target is '0.48x NAV' – or that they think the company is worth 48% of Net Asset Value. This is the reason I call these reports idiotic... the analyst himself says the company is worth more than $50 per share (the Net Asset Value). This could also be looked at as a break-up value for the company."
Sum of the parts is clearly the best way to value CHK, not multiples. It is not very difficult, because CHK frequently sells meaningful fractions of its natural gas plays. That creates a very usable implied valuation for each play, which you can sum together with the drilling and gathering assets.


eahilf said...

Shale Bubble Grows on Near-Record Prices for Untested Fields

Weak action in CHK once again yesterday (Jan 9). Market action generally positive, albeit not impressively so -- intraday dips bought.

CP said...

Yeah, who should we believe, an equity research analyst at a firm I've never heard of, or half a dozen multinational oil companies?

eahilf said...

How weak? Near the end of the session I sold the Jan 22.50 puts for 24c -- couldn't resist.

eahilf said...

I'd never heard of Meredith Whitney before sub-prime...

CP said...

So, the guy with an economics degree from the firm no one has heard of doesn't feel that the prices paid by petroleum engineers at major oil companies are justified?

eahilf said... petroleum engineers at major oil companies are justified?

I feel pretty sure that it isn't the "petroleum engineers" who decide how much to pay.

Perhaps this sentence is interesting:

Marubeni Corp. (8002), the Japanese commodity trader, last week agreed to pay as much as $25,000 an acre for a stake in Hunt Oil Co.’s Eagle Ford shale property in Texas.

I'm not sure how many "petroleum engineers" work at Marubeni (a company I'd never heard of); but probably not many.