During the past few years, we've tracked the ups and downs of
Chesapeake Energy (NYSE:
. In the summer of 2010, I noted that Chesapeake'sCEO , Aubrey
always swings for the fences
Trouble is, he has swung and missed more often than not.
McClendon appeared to have a few tricks up his sleeve and was
able to boost this stock nearly 50% to more than $30 a share by
early 2011. But his attempt at empire building through an
aggressive set ofasset purchases eventually became his undoing.
Earlier this year, he belatedly responded to investors' demands
that he shake up the company's board and seek asset sales to
lighten theload on an increasingly scarybalance sheet .
Such moves were expected to enable this stock to finally rebound
and indeed it has perked up a bit in recent months. Investors have
come to anticipate a series of asset sales that could finally give
fresh support to this beleaguered stock. So whenshares prices
barely budged on word that the company would sell $6.9 billion in
assets, the investor reaction was underwhelming.
A few days ago, I
took a quick peek
at these moves and concluded that "...analysts are now tasked
with figuring out a value for the remaining assets. The tepid
investor reaction may be grounds to assume that a figure in the
$20s -- and not the $30s -- is what you should be thinking
Well, what do the analysts actually have to say? I've found four
different views and only one of them could be considered a
certifiablebull on this stock. Let's start with the mostbearish and
work our way up:
• UBS' William Featherston says this stock is dead money, as
seen by his $19price target , which is 8% lower than current
levels. He notes that Chesapeake didn't get the prices for these
assets that many had assumed, highlighting the company's weak
bargaining position. Potential buyers knew that Chesapeake needed
these deals to be concluded in 2012 because of a current short-term
loan that would start to extract much more painful interest rates
if it remained unpaid into 2013. His target price of 40% ofnet
asset value (NAV ) seems low, but reflects his concerns that the
balance sheet isn't truly fixed, only less broken.
• Citigroup's Robert Morris isn't much more sanguine with a $20
price target, down 2.6% from recent prices. He has revised hiscash
flow projections after these asset sales and finds shares to be
fully valued at five times his projected 2013 cash flow.
• Analysts at Credit Suisse, who maintain their $22 price
target, up 10% from current levels, express a different concern:
They note that Chesapeake has "...an abundantinventory of
liquids-rich drilling opportunities, but these plays are
characterized by higher capital intensity (i.e. will cost more to
develop), which creates challenges for CHK given its stretched
balance sheet." They also note that shares may continue to be
dogged by the fact that Chesapeake still has to sell $3 billion
more in assets to meet its targets.
But Chesapeake still has supporters who recognize the fact that
the company still has a very impressive asset base. Merrill Lynch's
Doug Leggate says the recent asset sales were a more significant
event than many realize, as they largely eliminates the chance that
Chesapeake will run into major financial distress. More to the
point, he says these asset sales will keep going beyond
management's formerly-stated goals in order to unlock a great deal
of hidden value.
The big chunk of asset sales on Wednesday, Sept. 12,
"...underlines management commitment to a harvest strategy that we
equate to a break up story, which we believe forcesmarket
recognition of under-recognized assets in the portfolio," noted
The analyst has taken a fresh look at Chesapeake's remaining
asset base along with the cash flow it is capable of producing. By
his math, this will be a $35 stock -- or a whopping 75% increase
from recent prices -- when more analysts dig deeper into
Chesapeake's portfolio. He's an outlier with this view, so clearly
Chesapeake has its work cut out to win back the hearts and minds of
the investment community.
Risks to Consider:
Natural gas and oil prices have firmed up recently, though
energy strategists say some of the premium is associated with
Middle East tensions, which could eventually abate. If so, then a
pullback in these commodities would send shares of Chesapeake back
down into the teens.
Action to Take -->
This is an interesting dichotomy. Citigroup and Merrill Lynch have
looked at the remaining assets -- and the cash flow they can
produce -- and have drawn starkly different conclusions. In light
of the uninspiring response to investors about asset sales thus
far, Chesapeake's board may follow Merrill Lynch's advice and seek
further asset sales -- above current targets -- until shares
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.