Here’s what I think about Chesapeake…
- As explained previously, their accounting and reserve estimation are very aggressive and more aggressive than most of its peers.
- Aubrey McClendon, the former CEO, was very good at selling and financial engineering. The royalty trust and the midstream deal were very good deals for Chesapeake. There is some hidden value in Chesapeake’s drilling carries (though this may be factored into Chesapeake’s PV-10 values already). The Volumetric Production Payments and the preferred share deals are kind of smart because they transfer collateral away from Chesapeake’s bondholders. This lowers the interest rate on the VPP and preferred shares (though Chesapeake will need to pay higher interest on any future bond issues).
- I was hoping that McClendon was using financial engineering to inflate Chesapeake’s books. Largely I don’t think that he did so. (If he did that, I’d probably be buying more puts.)
- The new CEO, Doug Lawler, is weird. He legitimately cut a lot of corporate excess. He is getting Chesapeake out of the real estate development business. Most people would tell investors about what they have done but Lawler has not. It’s like he wants to live in a fantasy land where he doesn’t want to admit that Chesapeake has problems like any other business??? I don’t get it.
Overall, I am still a little bearish on Chesapeake. I may have closed my position too early. But I don’t think that it’s a mistake to take profits given that Chesapeake is not completely awful. It is not the worst E&P out there (look at the ones with higher short interest than CHK).
*Disclosure: No position in CHK.