Chesapeake Energy Corp.'s stock price has tumbled 48 percent since August as natural gas prices have plummeted and questions have arisen about the company's ability to meet its announced spending goals.
Strong assets and a low sales price often lead to takeover talk, but one thing agreed on by the widely varied analysts who follow the company is that Chesapeake is not likely to change hands anytime soon.
“If I'm a major (integrated oil company) and would have the chance to take over these assets and get them at a steal, I'd go for it,” said Mike Kelly, an energy analyst for Global Hunter Securities in Houston. “But you're going to have to claw them out of (CEO) Aubrey (McClendon's) cold, dead hands. He's not giving the company up.”
Oklahoma law allowing staggered terms for directors makes a hostile takeover more difficult, Kelly said.
A Chesapeake spokesman declined to comment about the company's finances because Chesapeake's first-quarter earnings are scheduled for release Tuesday.
Analyst Philip Weiss agrees that Chesapeake is not a likely takeover target, but for a different reason.
“Nobody wants that,” Weiss said of the Oklahoma City energy company.
Chesapeake has used a series of complicated financial structures in recent years to raise the cash it needs to expand into lucrative oil fields instead of the natural gas plays the company has focused on throughout its history.
The plans include selling interest in Chesapeake wells to joint venture partners and using volumetric production payment plans — or VPPs — which allow Chesapeake to receive immediate payment for years of future oil and natural gas production.
“Nobody wants to step into eight joint ventures, 10 VPPs, part ownership of a services business and all of this debt,” Weiss said. “If I'm somebody who might be on the market for assets, I'd rather buy the properties now or wait for them to go into bankruptcy and buy them at fire-sale prices.”
Analysts are mixed on their view of Chesapeake's financial future.
“The talk of bankruptcy doesn't make sense to me,” said Tim Rezvan, an analyst with Sterne Agee in New York. “They have too many assets they can sell. There's a lot they could sell to meet their needs. The worst-case environment is that they may cannibalize growth with asset sales.”
Most analysts agree Chesapeake has one of the best asset portfolios in the industry.
The company is in 11 of the country's 13 most active fields. Unfortunately, most of those areas are rich in natural gas, which has lost much of its value at the current price of $2.19 per thousand cubic feet.
Chesapeake is actively developing oil and natural gas liquids-rich areas, but the company said in February that it will be 2014 before the increased liquids production will generate enough revenue to pay for operating
Chesapeake said it plans to cover the shortfall by raising between $10 billion and $12 billion this year through asset sales, joint ventures and other financial strategies.
Earlier this month, Chesapeake announced property and production interest sales worth $2.6 billion.
Chesapeake also is working to pay down long-term debt. The company cut its debt by about $2.2 billion in 2011 and has said it is on pace to eliminate another $800 million in 2012. Chesapeake finished 2011 with debt of about $10.3 billion.
Analyst Jeb Armstrong said he is not worried about Chesapeake's finances because the company has little long-term debt due until 2015 and that it can change its spending plans if it has to.
“The thing that Chesapeake and many other companies have at their advantage is the ability to control their capital budget,” said Armstrong, an analyst with Credit Agricole in New York. “There is a degree of cushion that they have should the expected cash flow not meet what they're looking for. I would agree that spending is on a track that would require higher prices and more asset sales along the way, but I think they have the flexibility to be able to adapt should the numbers seem to be out of reach.”
Others, however, say Chesapeake may not be so flexible.
“If I thought this was a financially sound company, my rating probably wouldn't be what it is,” said Weiss, who has a “sell” rating on the stock and has called for the company to replace McClendon and the entire board of directors.
“To meet the obligations under the VPPs, they have to spend to produce the hydrocarbons,” Weiss said. “They have obligations to drill under the joint ventures, so they can't just eliminate spending.”
Other analysts have more of a mixed view.
“Does the company have a liquidity issue that results into going bankruptcy? I don't foresee that at this point, but they definitely have a lot of work ahead of them,” said Scott Hanold, with RBC Capital Markets in Austin. “That creates a lot of risk.”
Some of Chesapeake's success is dependent on commodity prices.
“If the price of oil stays high, Chesapeake gets through this nicely and comes out on the other end looking like a revived company,” Global Hunter's Kelly said. “Shareholders are going to stand to prosper greatly if they stick it through. If you have a longer-term outlook, it represents an extremely good buying opportunity.”
But not all analysts are as optimistic.
“We just don't know what will happen with oil and natural gas prices,” Weiss said. “It's just not the prudent way to run this kind of business. The well-run successful companies are not doing business like that.”
Weiss is responsible for putting together his company's forecasts for energy prices.
“Whatever number I say is probably the one number it won't be,” he said. “There are just too many variables. It's not just the supply and demand. It's the domestic economy. It's the global economy. It's the fact that most of the world's liquid resources are controlled by sovereign nations, not companies, so supply and demand often doesn't matter with those countries.”