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
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 & 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
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 & 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 & 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
Joe Fisher, Houston