Reposted from Bloomberg News
Joe Carroll | March 12, 2012 | Bloomberg News
Chesapeake Energy Corp. (CHK) Chief Executive Officer Aubrey McClendon is cultivating investors from Seoul to New Delhi eager to own natural gas that’s 85 percent cheaper than Middle East supplies because of a glut in the U.S.
As head of the second-largest U.S. natural gas supplier, McClendon met executives of Asian power utilities and state-run energy companies on a 14-day trip last month. He said they’re unfazed by Chesapeake’s $10.3 billion debt load, more than twice Exxon Mobil Corp. (XOM)’s burden, and gas trading near a 10-year low of $2.23 per million British thermal units — two factors that have helped send its stock down 25 percent in the past year.
Chesapeake’s up-front costs to amass leases in gas-rich rock formations from Appalachia to the Rocky Mountains will pay off as overseas buyers flock to the U.S. market, the world’s biggest, for cheap and plentiful supplies of the fuel, he said.
McClendon, who co-founded Chesapeake in 1989, is counting on energy companies building the U.S.’s first export capacity at ports in the lower 48 states, allowing his investors to ship U.S. gas to more expensive Asian markets. His assumption was seconded by Exxon CEO Rex Tillerson, who told analysts four days ago he had “no doubt” North America will develop an export market, reversing Exxon’s previous skepticism.
$17 Billion Sale
Not all of Chesapeake’s partners are waiting on the future development of a North American gas-export market to profit.
Cnooc Ltd., China’s largest offshore energy producer, paid $1.08 billion in November 2010 for a one-third stake in Chesapeake’s holdings in an oil-rich section of the Eagle Ford shale in south Texas. The Hong Kong-listed company pledged another $1.08 billion to cover 75 percent of Chesapeake’s future drilling costs in the region.
With each acre of Chesapeake’s Eagle Ford property estimated by company geologists to hold 5,000 barrels of crude, Cnooc acquired about 1 billion barrels for $2.16 apiece. expenses for things such as pipes and pumping stations are adding another $15 a barrel of development costs in the area, leaving Cnooc ample room to profit when Texas crude is selling for more than $100 a barrel, McClendon said. By the end of 2013, he plans to sell more than $17 billion in assets including oil fields to cover a cash-flow gap aggravated by plunging gas prices. McClendon, who said he held 52 meetings in Asia, didn’t comment on pledges of new investment in the interview.
Divesting Permian Basin
The Permian resource accounts for 5 percent of the company’s value, he said. By McClendon’s math, that means Chesapeake as a whole is worth $100 billion, more than six times its current $16.2 billion market value. Chesapeake controls 15 million net acres of oil and gas formations, more than three times the area of New Jersey.
“We have the assets they want, and we need their money,” he said in the March 6 interview, referring to Asian investors. “They don’t say ‘You’ve got $2 billion too much debt.’ They say ‘You’ve got what the world wants, and someday gas prices are going to be unlocked from the jail cell where they are today, and you’re going to be the biggest winner.’”
U.S. gas has tumbled 24 percent this year, following a 32 percent plunge in 2011. Soaring production from shale fields in Texas, Louisiana and Pennsylvania smashed open by high-pressure jets of water and sand inflated supplies at a time of mild winter weather that suppressed demand for the furnace fuel.
Gas futures traded in New York touched $2.23 per million British thermal units on Jan. 23, the lowest since February 2002. Meanwhile, utilities in Japan are paying more than $18 for gas from Indonesia and Yemen.
Chesapeake’s shares have lost 25 percent over the last 12 months compared with a 3.2 percent drop in the Standard & Poor’s Oil & Gas Exploration & Production index. Investors grew cautious as its margins shrank, even as net debt improved.
Return on assets last year dropped to 4 percent from 5 percent, compared with an average increase to 4.8 percent from 4 percent for the 16-member benchmark index, as Chesapeake was stung by the swelling glut of North American methane. The company is responding by cutting gas-drilling expenditures to the lowest since 2005.
Cash Flow, Bonds
Facing a cash shortfall that Raymond James & Associates Inc. said could reach $3.5 billion this year, McClendon is shifting rigs from fields that contain mostly gas to formations soaked with crude oil and so-called gas liquids such as propane, which command higher prices.
Chesapeake’s 6.775 percent bond due in 2019 has non- investment grade ratings. Standard & Poor’s assigned a BB+, its top junk grade, and Moody’s Investors Service has it at Ba3, third to the top among non-investment ratings.
Chesapeake last sought an infusion of cash from Asia and the Middle East in 2010, when sovereign wealth funds including Singapore’s Temasek Holdings (TMSK) Pte bought $1.1 billion in convertible preferred stock. McClendon said he was strapped for cash at the time as the company acquired leases in Texas’s Eagle Ford shale and the Marcellus formation in Appalachia.
McClendon’s short-term goal is to boost oil and liquids production to as much as 214,000 barrels a day next year and 250,000 barrels a day in 2015. At the same time, Chesapeake is spending hundreds of millions of dollars on initiatives to lift natural gas demand by making the fuel competitive with diesel and gasoline in the U.S. transportation sector.
McClendon met energy executives, government ministers and fund managers during his Feb. 4-18 tour through cities that included Seoul, Tokyo, Beijing, Hong Kong, New Delhi and Abu Dhabi. The meetings included existing investors in Chesapeake and potential future stakeholders, McClendon said.
“They all want to be here,” McClendon said over a dinner of beefsteak, french fries and champagne on crushed ice in one of the four restaurants that dot Chesapeake’s 120-acre campus on the north side of Oklahoma City. “Nobody over there believes for a second that five years from now we’ll have sub-$3 gas.”
Chesapeake ended 2011 with $10.3 billion in net debt, down 18 percent from a year earlier and the lowest year-end figure since 2006, according to data compiled by Bloomberg. During the same five-year period, cash on hand increased more than 130-fold to $351 million and proved reserves more than doubled to the equivalent of 3.12 billion barrels of crude.
Exxon Mobil, the only company that pumps more gas from U.S. wells than Chesapeake, had $4.37 billion of net debt at the end of last year. The Irving, Texas-based company’s market value is 24 times larger than Chesapeake’s. On a per-reserves basis, Exxon’s net debt is equivalent to 2.9 cents for every thousand cubic feet of gas. Chesapeake’s debt load is 55 cents per thousand cubic feet.
McClendon said the company’s debt-per-reserves would be lower if not for U.S. Securities and Exchange Commission rules that prohibit energy companies from counting as proved reserves anything that won’t be pumped from the ground in the next five years. Even if Chesapeake made no more acquisitions or discoveries, the company’s current holdings are expansive enough to sustain 25 to 30 years of drilling, he said.
“Why would you care about $10 billion in debt for a company that has $100 billion in assets?” McClendon said. “There’s a scary amount of gas out there.”