What Chesapeake Energy is Really Worth to Investors

Chesapeake Energy recently gave a new investors presentation intending to attract more money.

They started off with the statement:

“During the past five weeks CHK has withstood an unprecendented negative media campaign,” it says. “While damaging in the short run to our reputation, these attacks have failed, and will continue to fail, to reduce the value of the company’s assets and our long-term attractiveness to investors. At the end of the day, asset value and quality will win and today’s shareholders should be well rewarded.”

It claimed that the value of its 6.2 million acres of oil and natural gas rich fields more than balance out the liabilities of its $13.2 billion debt.

But that is very vague, and leaves us wondering, just how much is Chesapeake actually worth?

Chesapeake claim that if they sold their liquid-rich plays that they could generate more than $50 billion, maybe even as much as $64 billion, and with the Permian Basin they could raise that to $69 billion. However the truth is that if McClendon could get those prices he already would. Instead the reality is different, as investors who are aware of Chesapeake’s liquidity problems are never going to pay full price for its assets.

In fact the company’s core assets are worth about $39 billion. $24.7 billion of proven reserves (unproven reserves are not given any value), $1.5 billion in discounted drilling carries, $1.7 billion invested in the Chesapeake Midstream division, $8.9 billion in the oilfield service division, and $1.7 billion in other assets.

In contrast it holds $13.1 billion in debt, and $6.1 billion in other forms of liability, giving it a total of $19.2 billion.

Taking these two totals gives us an implied core shareholder equity of $20 billion.

Even if we discount the value of assets by 25% in order to account for any surprises, or over optimism, it gives us a total asset value of $30 billion, and by increasing the liabilities by an equal 25% to give us $24 billion in total liabilities. That still leaves shareholders with $6 billion.

Although this doesn’t tell the whole story; analysts have highlighted the fact that if Chesapeake can’t generate ebitda in an trailing 12-month period that is more than 25% of its $13.2 billion debt pile, it will probably default on its debts.

As Christopher Helman at Forbes said, “Chesapeake figures that at $2 natural gas it would do full-year ebitda of $2.7 billion. At $3 gas it would make $3.25 billion, still less than it needs to stay within covenants. Gas today is $2.70 for the front end of the strip and $3.20 a year from now.”

Chesapeake can give as many presentations as they want about their net asset worth, but it will do they no good when the creditors come knocking at the door. They must sell something and quickly.

By. James Burgess of Oilprice.com