Chesapeake Energy

[GFG]

Anyone else vested in this highly controversial company?
Care to share analysis/thoughts?
Esp the negative ones

<vested - 23,000 shares>

[cyclone]

Longleaf Partners Fund 3rd Quater 2015 Commentary :

One of the largest producers of natural gas, natural gas liquids, and oil in the U.S., Chesapeake Energy declined 34% in the quarter. In line with our exposure, about 60% of the impact came from the options we own and the remainder from the common equity. Concerns remain over the company’s liquidity profile, but management made major strides to improve realizations by successfully renegotiating two contracts with pipeline operator Williams that reduces transportation costs.
Additionally, on October 1 the company announced the renewal of its $4 billion credit facility. Comparable asset sales in overlapping basins, such as Encana’s sale of Haynesville assets, further confirmed our appraisal of Chesapeake. The company’s shares remain more heavily discounted than its peers, yet CEO Doug Lawler is keenly focused on realizing value for shareholders even in this depressed energy price environment.
Further reducing costs, including the recently announced 15% headcount reduction, coupled with asset divestitures, should lead to a stock price more in line with intrinsic value, which we appraise at twice the current price assuming the underlying commodity prices remain depressed.

<not vested>

[HitandRun]

I was looking at CHK's latest 10K report:

1. Net worth was at 2.1B (including preferred stock of 3.1B).
2. Long term debt at 10.7B.
3. Expected future net cash inflows (based on crude at $50.28 and NG at $2.58) is 11.1B (@nominal value, 4.7B based on PV10). If we apply crude at $30 and NG at $2, chances are that the 11.1B will fall by 50%. 
4. Do note that annual interest of 500m (optimistic assumption) and administration expenses of 200m have not been taken into consideration in expected future net cash inflows simulation.
5. Re-structuring is clearly needed. 
6. Market capitalisation of company is 1.7B as at 26 Feb 2016.
7. My takeaway is that shareholders are either betting that energy prices will recover quickly or debt holders will take a huge haircut or both.
8. Incidentally, CHK debt is trading at around 20-30cts to the dollar last time I checked.

[GFG]

I was looking at CHK's latest 10K report:

1. Net worth was at 2.1B (including preferred stock of 3.1B).
2. Long term debt at 10.7B.
3. Expected future net cash inflows (based on crude at $50.28 and NG at $2.58) is 11.1B (@nominal value, 4.7B based on PV10). If we apply crude at $30 and NG at $2, chances are that the 11.1B will fall by 50%. 
4. Do note that annual interest of 500m (optimistic assumption) and administration expenses of 200m have not been taken into consideration in expected future net cash inflows simulation.
5. Re-structuring is clearly needed. 
6. Market capitalisation of company is 1.7B as at 26 Feb 2016.
7. My takeaway is that shareholders are either betting that energy prices will recover quickly or debt holders will take a huge haircut or both.
8. Incidentally, CHK debt is trading at around 20-30cts to the dollar last time I checked.

I am vested in CHK, which is why I started this thread hoping for alternative views

Not sure how u derive 3. 
It's hard to project future CF as it obviously depends on oil n gas prices, and I don't think anyone really knows, except the Saudis
But there are some crucial points that aren't mentioned:
1) credit facility of $4b
Assuming the credit is not cut, this can easily sustain CHK through 2016 n 2017's capex
2) hedges. CHK has hedged for 2016, locking in oil prices. Can't rem offhand what that is, but it's mid $40s
3) asset sales. CHK has crazily good acreage. Even its detractors don't deny that
Management is guiding for ard $700mil from asset sales
4) debt holders ARE taking a huge haircut. Management has already done a bond swap, and the latest results showed they bought back discounted bonds, the march'16 debt was repurchased at 5% discount, longer bonds were repurchased at 45% discount

[HitandRun]

Not sure how u derive 3. 

Hi Bro

You may wish to refer to pages 5 and 158 of CHK's 10-K for the information. {I think there is a typo on pg 158 which states that the assumption is 5.28 per barrel, it should be 50.28}

Typically, E&P in US disclose this PV10 information.

[GFG]

Not sure how u derive 3. 

Hi Bro

You may wish to refer to pages 5 and 158 of CHK's 10-K for the information. {I think there is a typo on pg 158 which states that the assumption is 5.28 per barrel, it should be 50.28}

Typically, E&P in US disclose this PV10 information.

I see, let me go look at it. thanks

BTW, long term debt is not $10.7bil like you said.
I'll cut and paste the relevant segment:
"Chesapeake made significant debt reductions in 2015, with total principal debt balances down to approximately $9.7 billion at year-end 2015 compared to approximately $11.8 billion at year-end 2014. In November 2015, the company repurchased $394 million of its 2.75% cumulative convertible senior notes due 2035. In December 2015, the company privately exchanged new 8.00% senior secured second lien notes due 2022 (second lien notes) for certain outstanding senior unsecured notes (existing notes). Approximately $3.9 billion of the existing notes were validly tendered in exchange for approximately $2.4 billion of the second lien notes. In addition, since September 30, 2015, the company has repurchased, for cash, approximately $240 million of 3.25% senior notes due March 2016 at an average discount of approximately 5% and approximately $60 million of debt due in 2017 (including convertible debt) at an average discount of approximately 45%.

As of February 23, 2016, Chesapeake's debt principal balance was approximately $9.5 billion, and the company's near-term liquidity consisted of over $300 million in cash and a $4 billion revolving credit facility, which was undrawn (other than letters of credit issued thereunder with the aggregate face amount of approximately $77 million). The company plans to repay the remaining balance of its 3.25% senior notes due March 2016 with available liquidity and expects to continue to take advantage of the significant discounts in the prices of its debt securities in 2016."

So as of end 2015, total debt is $9.7billion, and even that's been reduced to $9.5bil right now.

[HitandRun]

Bro

To see a reconciliation between my number and yours, please see page 51 of the 10-K. If you look at CHK's balance sheet (pg 76), the total debt reflected is not 9.7b wor .....

[Muck]

I don't think total "principal" debt equates to total debt. If you borrow $1m from the bank in principal, you still have to pay back $1m in principal + interest and fees.

[GFG]

Bro

To see a reconciliation between my number and yours, please see page 51 of the 10-K. If you look at CHK's balance sheet (pg 76), the total debt reflected is not 9.7b wor .....

Thanks for your reply.

Indeed, the difference of $1bil, lies mainly in the "principal amt" vs the "carrying amount" of the 8% 2nd lien debt due in 2022
This is from the recently concluded debt swap.

I cant figure out the reason why the carrying amount would be $1bil higher though.

[GFG]

Bro

To see a reconciliation between my number and yours, please see page 51 of the 10-K. If you look at CHK's balance sheet (pg 76), the total debt reflected is not 9.7b wor .....

Thanks for your reply.

Indeed, the difference of $1bil, lies mainly in the "principal amt" vs the "carrying amount" of the 8% 2nd lien debt due in 2022
This is from the recently concluded debt swap.

I cant figure out the reason why the carrying amount would be $1bil higher though.

Apparantly Im not the only one asking this question.
Here's a reply given by another contributor in another forum:

Great question. This relates to the accounting rule that applies to trouble debt restructurings.

CHK offered for exchange 12 different issues of its notes. 10 of those were offered for exchange at deep discounts and were accounted for as trouble debt restructuring.

If an exchange is classified as trouble debt restructuring, the following procedure is applied. If the future undiscounted cash flows of the newly issued debt are less than the net carrying value of the original debt, a gain is recorded for the difference. The carrying value of the newly issued debt is adjusted to the future undiscounted cash flow amount and no interest expense is recorded going forward.

If the future undiscounted cash flows are greater than the net carrying value of the original debt, no gain is recognized and a new effective interest rate is established.

CHK recognized a gain of $304 million related to the exchanges in Q4 (and direct costs of $29 million).