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Chesapeake Energy Puts Itself on Auction Block

Chesapeake Energy Puts Itself on Auction Block

Following a months-long acquisition spree and amid an environment of depressed oil prices, Oklahoma-based Chesapeake Energy Corp. is exploring "alternatives to enhance shareholder value, including a possible sale or merger of the company." The word comes on the heels of an expected $250 million second-quarter loss stemming from a write-down due to lower gas and oil prices. The company's board also adopted a shareholder rights plan, or poison pill.

The announcement also follows a recent shopping spree mounted by the company. In October, Chesapeake added 160 Bcf equivalent of gas when it bought two Oklahoma-based producers, the Midcontinent operations of DLB Oil &amp Gas, and AnSon Production Corp., for a total of $193 million (See NGI Oct. 27, 1997). In January Chesapeake made two other acquisitions for $88 million, adding 107 Bcfe of proven reserves and future drilling opportunities (See NGI Jan. 19, 1998). The company paid $50 million for 67 Bcfe of reserves in a deal with Calgary-based Ranger Oil. And it bought the Midcontinent properties of privately-owned Enervest Management for $38 million.

In March, Chesapeake completed its acquisition of Hugoton Energy, growing the company to about 1,050 Bcfe of proved oil and gas reserves, 80% of which are gas (See NGI March 16, 1998). In April, a deal was done with Oklahoma-based Gothic Energy giving Chesapeake the right for five years to develop 50% of Gothic's current and subsequently acquired undeveloped reserves (See NGI April 6, 1998). That agreement was part of a $70 million deal giving Chesapeake a portion of Gothic's proved developed reserves.

Last year, Chesapeake took a $236 million charge on fourth-quarter earnings to cover disappointing drilling results. The company was hit with a series of class-action suits after announcing its 1997 write-down. Shareholders alleged the company violated securities laws, which the company denies.

In the company's announcement last week, CEO Aubrey K. McClendon lamented Chesapeake stock is undervalued. "With our attractive Midcontinent and Canadian natural gas assets and with initial drilling results from three of our four major natural gas exploration projects expected in the next 30-60 days, we believe the full value of Chesapeake's assets are not recognized by the market. As owners of approximately 30% of the company's common stock, management and the board are committed to seeing that Chesapeake's shareholders are able to realize the full benefit of their investment in our company. The company has begun the process of selecting financial advisors."

Additions Fail to Move Stock Price

Standard &amp Poor's last week placed its single-B-plus corporate credit and senior unsecured debt ratings and single-B-minus preferred stock rating of Chesapeake Energy on CreditWatch with developing implications. Standard &amp Poor's bond analyst Josh Gonze said he believes the company's low stock price is what's driving the sale of Chesapeake. He said the company's series of recent acquisitions "has done nothing to improve [the stock price]. This is a dramatic ending to the flashy history that this company has had."

To Gonze, the shareholder suits against the company are a minor matter. "It seems to be minor enough that we didn't closely track it. It's the kind of thing that they're going to end up settling out of court for some amount of money that they can afford."

Chesapeake said it expects 1999 production to reach 140-145 Bcf of gas equivalent, of which 75% should be natural gas. If production goals are realized, and based on average realized wellhead prices of $18.00 per barrel of oil and $2.40 per Mcf of gas, the company believes earnings, before interest expense, taxes, depreciation and amortization (EBITDA) could total $270 million. These goals also anticipate a 1999 drilling capital expenditure budget of about $200 million and a cost structure of $0.52/Mcfe for lease operating and production tax expenses and $0.15/Mcfe for general and administrative expense.

In a conference call, Chesapeake officials said the company has hedged "a significant amount of our [gas] production. between 70 and 80%" through October of this year at prices ranging from about $2.38/MMBtu to $2.40 MMBtu. There are no oil hedges and no other gas hedges in place.

Gonze said the $18/barrel oil price projection was not out of line, at least for the long term. "We basically go with the industry-wide consensus that the long-term price for WTI (West Texas Intermediate) will be $18. We happen to be in a horrible year for oil prices with very high inventories that will hold down the price of oil for the remainder of '98. We have essentially given up trying to predict when it's going to come back again. sometime in 1999."

Joe Fisher, Houston

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