Chesapeake: Square Peg & Round Hole

Conference call notes:

Thrice they were asked how much was drawn on the revolver as of Friday.  Answer 1:  Referenced March 31 and and $3 billion less than Friday.  Answer 2:  Don’t recall, but $3 billion less than Friday (flippantly)  Answer 3:  Was north of $3 billion (duh!) (remember it’s a $4 billion facility).  Apparently they had been working on this new term loan for several weeks.  Expect to pay it back in the Q3 this year with the Permian sale.  The term was necessary to keep them from being a distressed seller.

The Permian divestiture was announced basically when they thought of the idea.  The last three months were spend getting the data room open.  Could go as one package or three packages.  Do not be surprised by a small June divestiture elsewhere.

They are dismantling the land machine, having spent $5 billion in 2010, $1 billion in Q1 2012, and budgeting $500 million in 2013.

Going forward they look to harvest ‘industry leading returns’ on their ginormous asset base.  Unsaid is they may have the best rock but are behind the technological learning curve.  Just compare EOG’s Eagle Ford results to Chesapeake’s…

Chesapeake’s world class long dated asset base does not fit into the short and medium term liability structure.  The asset base requires Chesapeake to plow forward with horizontal drilling capex.  Depressed natural gas prices have killed cash flow.  The short term debt has covenants.  The asset and liability mismatch could get worse before it gets better.

Aubrey stated $80 oil does not change drilling returns from $100.  I call bullshit.  Horizontal oil drilling is highly capital intensive and affects everyone else!  Let’s be clear:  $80 will exacerbate Chesapeake’s square peg into a round hole problem.

Update:  Chesapeake turned down a $3.5 billion Permian offer from Occidental.  Forbes

Update 2:  Chesapeake term loan carries an effective 20% interest rate.  Valueconcious at Investorvillage