Chesapeake Business Practices

[OKCTalker]

Chpk has spent $3.2 million on Thunder season tickets this season...just another way for Aubrey to take Chpk dollars and put them in his own pocket. Kind of like the arena naming rights deal, although he decided to donate those proceeds to try to fend off the criticism.

Can you show how a portion of ticket sales go to Aubrey McClendon? Also, how did he receive "proceeds" from the arena's name?

[Oil Capital]

they have not come close to "leveraging every asset they can" .....

Didn't they just announce that they were slowing down asset sales because such sales would put them in violation of loan covenants? That sounds very much like a company that is "leveraging every asset they can" or pehaps has already "leveraged every asset it can."

[Oil Capital]

Can you show how a portion of ticket sales go to Aubrey McClendon? Also, how did he receive "proceeds" from the arena's name?

Well, doesn't he own roughly 18% of the team? Therefore, it stands to reason that roughly 18% of the ticket sales "goes" to Aubrey McClendon. Same for the naming revenue. Of course it does not go directly from Chespeake into Aubrey's pocket. But that is hardly necessary in order for it to be a conflict of interest.

[SharkSandwich]

Didn't they just announce that they were slowing down asset sales because such sales would put them in violation of loan covenants? That sounds very much like a company that is "leveraging every asset they can" or pehaps has already "leveraged every asset it can."

This.

[OKCTalker]

Well, doesn't he own roughly 18% of the team? Therefore, it stands to reason that roughly 18% of the ticket sales "goes" to Aubrey McClendon. Same for the naming revenue. Of course it does not go directly from Chespeake into Aubrey's pocket. But that is hardly necessary in order for it to be a conflict of interest.

The City of OKC owns the arena, and CHK pays $3 million per year to the City for naming rights.

[Diesel54]

The City of OKC owns the arena, and CHK pays $3 million per year to the City for naming rights.

Nope.
http://newsok.com/aubrey-mcclendon-i...rticle/3670438

[OKCTalker]

Well DANG! I was looking at Wiki which reports this:

On July 22, 2011 a twelve-year naming rights partnership was announced, the partnership between the Oklahoma City Thunder and Chesapeake Energy Corporation to rename the arena Chesapeake Energy Arena.[9] The agreement between Chesapeake and the Thunder has an initial annual cost of $3.0 million with a 3.0% annual escalation.[9] Included in the agreement Chesapeake will have its branding throughout the building, prominent premium placement on the high-definition scoreboard and on new state-of-the-art interior and exterior digital signs. Most of the new signs will be in place before the start of the Thunder’s 2011-12 season.[10]

[onthestrip]

Can you show how a portion of ticket sales go to Aubrey McClendon? Also, how did he receive "proceeds" from the arena's name?

Diesel54 just linked a story that shows how Aubrey receives "proceeds" from the naming rights. As well as all the in game advertising chpk does with the team. And yes, as a part owner, he definitely profits when tickets are sold. Quite interesting that Chpk is the biggest sponser of the Thunder as well as the biggest ticket buyer, all of which benefit Aubrey as an individual.

It was apparently enough of a conflict of interest for him to voluntarily donate his share of the arena naming rights "proceeds"

[Pete]

It was apparently enough of a conflict of interest for him to voluntarily donate his share of the arena naming rights "proceeds"

The naming rights deal was finalized 10 months ago and he only made this announcement after the media started to turn up the heat regarding his other possible conflicts of interest.

That timing, coupled with the lack of specifics about the proposed donation(s), gives the strong impression of damage control.

[Pete]

Just saw this in relation to them increasing their bridge financing to $4B:

The loan will pay an initial interest rate of 8.5 per cent, rising to 11.5 per cent if it has not been paid off by the start of next year.

That means that CHK could be paying fully half a billion a year in interest just on this one loan.

[jn1780]

Aubrey: "We got a loan! Lets go to the casino!"

[onthestrip]

The naming rights deal was finalized 10 months ago and he only made this announcement after the media started to turn up the heat regarding his other possible conflicts of interest.

That timing, coupled with the lack of specifics about the proposed donation(s), gives the strong impression of damage control.

Ya thats what I meant. I should have said he semi-voluntarily donated the proceeds. It was certainly an act of damage control

[dankrutka]

Just curious, but what are do most people think the possibilities are if CHK fails? What does failure look like? Is CHK likely to stay in OKC? Emerge as a different company? Be bought out and moved?

OKC has such great positive momentum right now and I am worried that Aubrey could kill it through his recklessness. How worried should I be? I've followed this situation for quite a while, but my knowledge in this area is very limited. Thanks...

[adaniel]

After doing some research on my own, I'm not really worried about some sudden collapse. I would be the last person to defend Chesapeake, but there is a lot of armchair quarterbacking on here right now. They are guilty of some very poor decision making, but the Enron comparisons are moronic, considering that most of Enron's assets were completely fraudulent. CHK as of now has a lot of assets, is paying its bills, and generating revenue. Had it not been for one-time adjustments CHK would have actually made money last quarter (albeit much less its peers) than instead of recording a net loss of $71 million last quarter.

Now, long term. Well that's a whole 'nuther story. They will definitely be hobbled in the future by their massive debt load, even if natural gas prices go up (which they will and already are). Should natural gas prices be this low this time next year, I wouldn't be shocked if they started having targeted layoffs, although should things progress to that point they would hardly be the only one. But that is a Chesapeake problem, not an OKC problem.

OKC is bigger than one company. We now have Continental (which is staffing up bigtime), the Boeing transfer, and whatever mystery company may or may not be coming to the area. We are well positioned to be the unofficial hub of the Mississippian play, compared to Wichita or Tulsa. The hiring at CHK was pretty unsustainable IMO and was going to slow eventually. But we have enough going on in OKC to continue the momentum.

Personally, I am much more worried about the next round of BRAC and how it will affect Tinker.

[Roadhawg]

I'm not positive but I thought I heard on the news last night that Chesapeake's credit rating was dropped again to BB-. Can't swear to it but thought I heard that.

Yep I did hear that... http://www.koco.com/news/money/Chesa...z/-/index.html

[Pete]

Here are some possible worst case scenarios:

1) Assets may be over-stated and leveraged through so many complex financing schemes that they can't sell them as soon and/or for as much as they would like, and then dominoes start to fall. I could foresee a scenario not unlike McClendon's own margin call debacle where they just get caught out (like not being able to repay the new $4B bridge loan, triggering massive interest payments) resulting in a catastrophic chain reaction.

2) Icahn or another outside force blows them apart and sells off their assets, leaving very little in OKC.

3) They die a slow death, where they have to keep selling and laying off people until the company is sold or merely a shell of it's former self.


I, too, think the Enron comparison is probably not justified apart from their off-balance sheet dealings.

As much as I hate to say this, Chesapeake's situation reminds me much more of Penn Square Bank.

[ou48A]

“Is CHK a Ch. 11 candidate?
There is a definite possibility they have liquidity issues.”


Where Will Chesapeake Energy's Cash Come From?

http://seekingalpha.com/article/5863..._sectors&ifp=0

Friday May 11th was an interesting day for Chesapeake Energy (CHK) with the delayed filing of their 10Q. The stock was down over 15% intraday and closed down almost 14%. The main catalyst for this was the disclosure that selling certain assets may violate certain credit covenants. My question is, if they can't sell the assets they wanted to, where is the cash to fund their massive capex program going to come from? Their 10Q looks rather dire:

Current Assets: $3.9B
Current Liabilities: $6.7B
Unevaluated Properties: $17.6B (we will get to this later)
Cashflow from Operations: $274 MM
Q1 Drill & Complete (Net of carries) Capex: $2.5B
Q1 Land Acquisition (Net of carries) Capex: ~$1B
Q1 Midstream/Oilfield Services/etc Capex: $0.75B
Total Capex in Q1: ~$4.25B
There is quite the disparity between capex and cash from operations. They have said that capex was going to be front-loaded in the first quarter so we should annualize these numbers over 2012 to get a better idea of what is going on.

CHK is projecting total capex for 2012 will be $7.5-$8B on the D&C side, $1.6B on the land side, and $2.5B-$3.5B for their midstream, oilfield services, etc. The grand total is $11.6B-$13.1B. $11.6B in capex net of drilling carries is crazy for a company of their size. Look at some of the other independents' projected 2012 capex. Keep in mind these companies listed below are much larger than CHK:

Anadarko Petroleum (APC): $7B
EOG Resources (EOG): $7.5B

As a side note, these independents have only spent ~$2B in capex for Q1 2012. CHK has them doubled at roughly half the market cap.

Extrapolating cash from operations out over four quarters gives you $1.1B in cash coming in. Expected capex is 10 times cash from operations. They are looking at a $10B deficit. Some may counter that natural gas prices will rise and bring up cash from operations. This may be true, but even if you double cash from operations, they are still looking at a $9B gaping hole in their cash flow statement. Now, deficit spending is not something new to CHK, however, the company is in new waters this time with $13B in debt already and more importantly, being virtually unhedged on their major product, natural gas.

They announced in the 10Q that they will have to delay selling certain assets to avoid violating credit covenants. Which assets are they talking about? It had to have been something material. The only material assets they have specifically talked about selling was the Permian. The rest of their plan was to VPP the Eagle Ford and JV the Mississippian Lime. Selling out the Permian assets was a critical piece of their planned asset sales. If they can't sell that, or can't sell for awhile, where is the cash going to come from? The Eagle Ford VPP and Mississippian Lime JV, based on past VPPs and JVs, will probably bring in roughly $3B. Don't forget that a good chunk of this will be drilling carries from the JV which is spread out over a few years.

Speaking of drilling carries, Chesapeake has done multiple joint ventures that involve drilling carries. Drilling carries aren't even going to come close to saving them. They are mostly gone and the capex numbers above are net of drilling carries anyways. They only have $1.9B in drilling carries remaining. A few problems with these carries are that they are spread over a few years and the fact that over $500 MM of these carries are in the Niobrara, a play which has not worked out extremely well for CHK.

Stock issuance? After the beating they have taken, I don't think anyone is expecting an equity offering. Although, with current management, I would not rule out anything. Debt would go against their 25/25 plan to reduce debt to $9.5B by EOY. Assuming they get $3B for the VPP and JV and the Permian sells for a generous $8B, they are just cashflow neutral. They won't even be close to getting the current $13B in debt down to $9.5B.

Selling the Permian also sells one of the very things they are looking to increase: liquids. The "Western" portion is where the Permian Basin is located. This division provides 30% of the total liquids produced by CHK. You can also tell from the realized prices per region that this area is where most of the oil CHK produces is located. Realized prices are in the $8x range vs. the other areas where they are $6x. This is, in my opinion, one of the reasons CHK still does not break out oil and NGLs on their statements of revenue. The oil volumes are pitiful and they are planning on selling most of it.

All of this boils down to one thing...I think capex has to be cut dramatically. At some point CHK needs to take a look and see that they can't be spending double the capex of companies that are double the size of them. It's just not sustainable. Cutting capex brings huge problems when you have $18B in unevaluated properties on your balance sheet. O&G leases have terms and must be drilled to be retained. I think CHK is looking at asset writedowns anyway due to the way their asset valuations are calculated using trailing gas prices. They will be looking at even more writedowns on their $18B of undeveloped acreage as leases expire due to cutbacks in capex.

Is CHK a Ch. 11 candidate? There is a definite possibility they have liquidity issues. Their three revolvers are drawn down to the point of only having ~$2B remaining on them. The borrowing limits of two subsidiary revolvers were recently cut by the lenders. Current liabilities dwarf current assets by almost $3B. The difference in AP and AR eat up just about all of the cash on the balance sheet.

Obviously the company understands these issues due to the emergency Goldman loan late on Friday night. The terms of this loan should give you a good sign of the deteriorating credit worthiness of CHK. Earlier this year they placed ten year notes for 6.125% and seven year notes for 7%. The loan from Goldman is a five year loan at 8.5%. All of this to pay down a revolver that has an interest rate of a couple percent. Death spiral?

The issues with the Board and CEO are well discussed and I won't dig deep into them here. The issues are extensive and range from excessive director/CEO compensation to the CEO recklessly gambling with the company's cash flow hedges to the CEO running a hedge fund while running CHK. I think the shareholders would do well to install a new Board and new management with more realistic goals of what the company can accomplish. Reducing debt to $9.5B by EOY while filling the cashflow gap or expecting to be cashflow positive in 2014 are pretty lofty goals especially when cash from operations is only a measly $1B/yr. Management should take a look at what is actually achievable/sustainable and trim acreage and capex to meet. All of the assets in the world mean nothing if you can't drill them.

I personally think the company has some good potential if they take the right steps. The right steps are drastic and will probably hurt the egos of a few, but they are necessary. One of those steps includes showing the CEO the door. He is a loose wheel who brings about a new news story everyday which can give you an instant 15% haircut on your long position. Today it looked like a few big players are getting tired of the haircuts. The selling blocks were huge with some volume ticks showing 5 million shares traded within a minute or two. Another huge step needed is to cut the size of the company drastically. There's too much acreage. Sell it. Capex and cash from ops can't keep up.

On the opposite side, I don't think CHK is a good short candidate due to the fact that if the board were to wise up and show AM the door, I believe the stock would jump fairly high. It did a 10%+ jump when it was announced he was going to no longer be chairman. The jump from no longer being CEO should be much greater. I think it is best to sit this one out until some clarity is given on company direction.

[jn1780]

Here are some possible worst case scenarios:

1) Assets may be over-stated and leveraged through so many complex financing schemes that they can't sell them as soon and/or for as much as they would like, and then dominoes start to fall. I could foresee a scenario not unlike McClendon's own margin call debacle where they just get caught out (like not being able to repay the new $4B bridge loan, triggering massive interest payments) resulting in a catastrophic chain reaction.

Having a complex financing scheme is extremely risky right now because the financial system is extremly unstable. Lots of potencial black swans out there in the world and Chesapeake is unprepared for any kind of "hiccup" in the system.

[Maynard]

S&P rates Chesapeake Energy Corp 05/16 01:10 PM

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May 16 - Standard & Poor's Ratings Services today assigned its 'BB-' rating to Chesapeake Energy Corp.'s $4 billion senior unsecured term loan due Dec. 2, 2017. The recovery rating is '3', which indicates our expectation of meaningful recovery (50% to 70%) in the event of a default.

Standard & Poor's lowered the ratings on Chesapeake on April 26, 2012, and again on May 15, 2012. The downgrades reflected a confluence of factors, including turmoil over revelations about its CEO's personal financial transactions and increased funding risks stemming from weak internal cash generation and very heavy capital expenditures.

Our corporate credit rating on Chesapeake is 'BB-' and the rating outlook is negative.

Chesapeake recently announced that it had entered into a $4.0 billion unsecured term loan facility, maturing in 2017, with proceeds to be used to repay borrowings under the company's existing corporate revolving credit facility. Borrowings may be repaid at any time this year without penalty, and Chesapeake has stated it intends to do so, out of asset sale proceeds. Although this transaction enhances Chesapeake's near-term financial flexibility, it is costly for Chesapeake: the newly-issued debt carries an initial variable annual interest rate through Dec. 31, 2012, of LIBOR plus 7.0%, which is currently 8.5%, given the 1.5% LIBOR floor in the loan agreement. Subject to certain limitations, the interest rate would step up to a fixed rate of 11.5% if the loan is not repaid by May 11, 2013.



RATINGS LIST
Chesapeake Energy Corp.
Corporate credit rating BB-/Negative/--

New Rating
$4 billion senior unsecured term loan BB-
Recovery rating 3

[Pete]

Interestingly, Icahn filed his first quarter report and he does not hold any CHK stock.

Probably a good thing, although he could provide a much needed kick in the tail.


Stock closed just barely over $14 today. They had recovered a bit but I think when the Icahn news got out, it was all downhill from there.

Should be a very interesting shareholders meeting in a month.

[Maynard]

Interestingly, Icahn filed his first quarter report and he does not hold any CHK stock.

Probably a good thing, although he could provide a much needed kick in the tail.


Stock closed just barely over $14 today. They had recovered a bit but I think when the Icahn news got out, it was all downhill from there.

Should be a very interesting shareholders meeting in a month.

Investors want Chesapeake annual meeting delayed 05/16 03:25 PM

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May 16 - Shareholders have asked a judge to delay Chesapeake Energy Corp's (CHK:$14.04,00$-0.61,00-4.16%) annual meeting, arguing that more disclosures are needed about Chief Executive Aubrey McClendon's compensation and personal loans taken out against his share in company wells.

Investors need more information to make "an informed vote" on three shareholder proposals and the re-election of Richard Davidson and Burns Harris to the board of directors at the meeting planned for June 8, said the motion filed in U.S. District Court in Oklahoma City, Oklahoma.

Reuters reported on April 18 that McClendon had arranged loans totaling $1.1 billion where his interest in thousands of wells granted as a corporate perk were put up as collateral.

The bulk of the loans were made by EIG Global Energy Partners, an investment firm that also provides significant amounts of funding to Chesapeake. Both situations could put McClendon's interests at odds with shareholders, analysts and academics said.

Since the Reuters investigation, Chesapeake and McClendon have expanded their disclosures about his well interests and the program that grants him 2.5 percent of every well the company drills. The program, called the Founders Well Participation Program (FWPP), will be terminated 14 months early.

A spokesman for Chesapeake said the meeting schedule had not changed.

That motion to postpone Chesapeake's annual meeting was made as part of a lawsuit filed in April seeking more disclosures about the FWPP.

Shares of Chesapeake fell to a low of $13.90, and closed down 4 percent on Wednesday at $14.04.

[Pete]

CHK stock trading well below $14 today.

I read through their proxy statement for their June 6th shareholders meeting and found this.

Keep in mind, they are just giving stock; these are not options. Their HR person has averaged almost $5 million for the last several years.

During this period, McClendon was #2 in total compensation for all CEO's in the U.S. Their other top execs aren't far behind.


Consider that in 2008, their stock was trading around $70 per share, and as of today is is about $13.60. In other words, the stock has fallen over 80% during these years.

[ou48A]

Interestingly, Icahn filed his first quarter report and he does not hold any CHK stock.

Probably a good thing, although he could provide a much needed kick in the tail.

The ability of Carl Icahn to buy very many CHK shares may be currently limited by his takeover of CVR Energy Inc. (CVI)

“CVR rose 1 percent to $30.35 at the close in New York. The shares have gained 62 percent this year. The owner of refineries in Coffeyville, Kansas, and Wynnewood, Oklahoma, has benefited from a boom in onshore shale-oil production that lowered the cost of crude it buys”
I have a small position in CVI

[Maynard]

Credit worries intensify for embattled Chesapeake 05/17 10:42 AM

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By Joy Ferguson and Melissa Mott

NEW YORK, May 17 (IFR) - Credit markets are signaling steadily growing concerns about troubled oil and gas producer Chesapeake Energy, raising pressure on the company to deliver on its strategy of planned asset sales.

The company's bonds, protection on those bonds and its shares have all been battered in recent months following a series of Reuters reports revealing potential conflicts of interest in loans extended by the company to Chief Executive Aubrey McClendon against personal stakes in the company's wells.

The reports have come as Chesapeake grapples with a 2012 funding shortfall of $9 billion to $10 billion as natural gas prices remain at their lowest in a decade. The company managed this week to tap the capital markets for a $4 billion bridge loan -- but investors are still worried.

"They need too large of an asset sale over too short of a time, otherwise they are going to have a liquidity crisis," said Marc Gross, portfolio manager at RS Investments' high-yield and floating-rate bond funds.

"All of the problems they are having today is because they didn't expect $2 gas, and it's hurting them a lot more than they are letting on. The company is under stress," he said.

The cost of insuring Chesapeake bonds against potential default jumped on Thursday after hedge fund manager T Boone Pickens dumped 71,000 of its shares.

Five-year credit default swaps were last trading 26 basis points wider at a record wide of 887, surpassing the previous historical wide of 828 seen in Jan, 2009.

That means it costs $887,000 a year for five years to insure $10 million of debt. Shares hit a fresh 52-week low of $13.50.

Shorter-term contracts are looking even more ominous, with one-year CDS close to 1,000, about double its level a week ago.

The one-year contract is less liquid than the five-year and can balloon wider or compress swiftly due to market technicals. But it is highly sensitive to the market's perception of credit risk.


SENTIMENT FADING FAST

The CDS price movement has been accompanied by an increase in net notional, or CDS positions, as measured by data provided by the Depository Trust Clearing Corp.

Data for the four-week period ending May 12 shows a more than 10 percent increase in dollar equivalent to about $1.3 billion, suggesting a rapid deterioration in sentiment and in risk aversion.

The company's CDS credit curves have dramatically flattened in the one-month period and several are now inverted, suggesting investors are even more fearful about what's ahead.

Standard & Poor's this week expressed concern about a covenant breach in the next three quarters as the company's debt levels climb. The company's loan covenants already state its debt cannot exceed 4 times its lagging 12-month EBITDA. Total debt as of March 31, 2012 was $13.1 billion, while EBITDA was weak, at $838 million.

S&P downgraded the credit to BB-, citing "increased funding risk stemming from weak internal cash generation and very heavy capital expenditures," alongside the revelations about the CEO's tangled personal financial transactions.

It was the second downgrade in three weeks and comes after Moody's a week earlier changed the outlook on its Ba2 rating to negative from stable.

"Their entire thesis has changed over the last couple of weeks," said Gross. "This was a company that said they had investment grade metrics and in the short term would be an investment grade company, and now they've been downgraded twice".

Philip Adams, credit strategist at GimmeCredit, agreed.

"This story would not have as much traction if natural gas was at $6 per million cubic feet and CHK was "A"rated and generating gobs of free cash flow," he said. "One of the consequences of being sub-investment grade is that spread volatility can be 'manic."

Chesapeake's bonds have been some of the most active and worst performing credits for the past several weeks. Chesapeake's benchmark 6.625% notes due 2020 traded at 90.50 today (Thursday), down two points from yesterday. Since May 1, the 6.625% notes have dropped over eight points.

"They are fading back to a mid high-yield company, so the class of investors changes," said Gross. "It's now a true high yield play, and with some hair on it, because of the investigations and disclosures, and Chesapeake has had to migrate into different hands."

Hedge fund and pure high-yield funds have replaced insurance companies and pension funds as holders of the debt as the notes get downgraded, forcing higher quality funds to sell out of the name.

[Pete]

Where the heck has MikeOKC been lately?

He's been all over CHK for years and now that things are hitting the fan in earnest he's been completely AWOL for a couple of weeks.