Following a months-long acquisition spree and amid anenvironment of depressed oil prices, Oklahoma-based ChesapeakeEnergy Corp. is exploring “alternatives to enhance shareholdervalue, including a possible sale or merger of the company.” Theword comes on the heels of an expected $250 million second-quarterloss stemming from a write-down due to lower gas and oil prices.The company’s board also adopted a shareholder rights plan, orpoison pill.

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

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

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

In the company’s announcement last week, CEO Aubrey K. McClendonlamented Chesapeake stock is undervalued. “With our attractiveMidcontinent and Canadian natural gas assets and with initialdrilling results from three of our four major natural gasexploration projects expected in the next 30-60 days, we believethe full value of Chesapeake’s assets are not recognized by themarket. As owners of approximately 30% of the company’s commonstock, management and the board are committed to seeing thatChesapeake’s shareholders are able to realize the full benefit oftheir investment in our company. The company has begun the processof selecting financial advisors.”

Additions Fail to Move Stock Price

Standard &amp Poor’s last week placed its single-B-pluscorporate credit and senior unsecured debt ratings andsingle-B-minus preferred stock rating of Chesapeake Energy onCreditWatch with developing implications. Standard &amp Poor’s bondanalyst Josh Gonze said he believes the company’s low stock priceis what’s driving the sale of Chesapeake. He said the company’sseries of recent acquisitions “has done nothing to improve [thestock price]. This is a dramatic ending to the flashy history thatthis company has had.”

To Gonze, the shareholder suits against the company are a minormatter. “It seems to be minor enough that we didn’t closely trackit. It’s the kind of thing that they’re going to end up settlingout of court for some amount of money that they can afford.”

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

In a conference call, Chesapeake officials said the company hashedged “a significant amount of our [gas] production. between 70and 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 othergas hedges in place.

Gonze said the $18/barrel oil price projection was not out ofline, at least for the long term. “We basically go with theindustry-wide consensus that the long-term price for WTI (WestTexas Intermediate) will be $18. We happen to be in a horrible yearfor oil prices with very high inventories that will hold down theprice of oil for the remainder of ’98. We have essentially givenup trying to predict when it’s going to come back again. sometimein 1999.”

Joe Fisher, Houston

©Copyright 1998 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.