Chesapeake Energy Capital Classic (Photo credit: Wikipedia)
April 11
THESIS:
There is an increasing ( and WRONG ) chorus of investors wanting to gamble on a nat gas bottom and Chesapeake in particular. Nat Gas prices are hurting the sector and producers are indicating the low prices may get even worse. Chesapeake continues to sell interests to keep its cash flowing .
Chesapeake Energy announced three deals late Monday that will raise a total of $2.6 billion in cash, as it looks to cover off an anticipated funding shortfall alter this year. Chesapeake struck a $745-million natural gas production deal with an affiliate of Morgan Stanley (MS)
.In that deal, called a volumetric production payment (VPP), Chesapeake receives cash up front for future oil and gas production in a 10-year agreement linked to some of the company’s reserves and assets in the Granite Wash in Oklahoma. In another transaction, Chesapeake sold $1.25 billion of preferred shares in a subsidiary called CHK Cleveland Tonkawa LLC. The purchasers were led by an affiliate of the Blackstone Group (BX) and included private equity firms TPG Capital and EIG Global Energy Partners.
Finally, the company will sell 58,400 acres in Oklahoma to a subsidiary of ExxonMobil (XOM) for $590 million.
The company should reduce debt by ~$2 billion in 2012, given ~$10 billion in divestiture proceeds, ~$4 billion in operating cash flow and ~$12 billion in capital spending/leasehold acquisition. One analyst has high confidence the company achieves at least the low end of its “$6-8 billion in additional asset sale proceeds” as the Permian alone should garner ~$8 billion assuming ~$3,000/acre and a $100,000/Boe flowing rate multiple. Additionally, he believes Chesapeake should monetize ~$2 billion in midstream/oilfield service/miscellaneous assets this year.
Canadian Producers Are Facing The Music ( The AMP Follows UP by Avoiding Most Of The Nat Gas Focused Names)
As gas prices waver just above the $2 mark, investors have been indiscriminately selling off any and all stock with gas exposure. As selling pressure mounts, hedging programs have come into focus, prompting several companies to update investors on their hedging programs.
Late Monday, Advantage Oil & Gas announced that it added collars on ~50% of its H2/12 gas production with a floor of C$1.85/Mcf and a ceiling of C$2.70/Mcf. It has protected a good level of production beginning in May at $1.85 but given away upside on nearly half its forecast volumes at $2.70. This supports a bearish view for gas prices over the near term.
Also noteworthy is that Progress Energy was active in Q1 adding summer hedges for this year (Q2-Q3) on about 30% of its forecast gas volumes at ~C$2.40/Mcf.
ARC Resources also added to its gas protection for 2012 with an additional 80 MMcf/d of NYMEX gas hedges in Q2-Q4 (it blended into its existing hedge book but average swap price on the incremental volumes appears to be between US$2.50-US$3/Mcf). ARC also added ~40 MMcf/d in 2013 with a US$3.25-4.00 collar. Importantly, a Bay Street analyst notes that ARX, Bellatrix Exploration (BXE), and Peyto Exploration (PEY) have the largest proportion of downside protection, while Birchcliff (BIR), Fairborne Energy (FEL), Paramount Resources (POU) , and Bonavista Energy (BNP) have zero or limited downside protection.
