Chesapeake Energy was recently listed in Fortune as ranking number 30 in the Forune’s 2006 list of 100 fastest growing companies. “The Oklahoma City, Oklahoma-based company saw profits rise at a rate of 79% and revenues grow 74% with a stock return of 45% on average annually over the past three years. The company ranked 46 on the 2005 list.”
Looking at it from a valuation standpoint it appears to be extremely undervalued. I was digging around the 2005 annual report and found something very interesting; Chesapeake’s assets are hedged.
“I would next like to discuss the tremendous value that we believe is embedded in Chesapeake’s stock. Using year-end 2005 NYMEX prices of $10.08 per mmbtu of gas and $61.11 per bbl of oil, Chesapeake’s proved reserves have a PV-104 value of $23 billion. In addition, we have 8.4 million net acres of leasehold on which we have identified 28,000 locations that we believe contain unproved reserves of 8.8 tcfe. We believe these are worth somewhere between $5 and $10 billion. Furthermore, we believe our non-E&P assets have a value of nearly $2 billion.
Therefore using year-end oil and natural gas price assumptions, the asset value Chesapeake has built for investors equals $30-35 billion. When debt and other liabilities of about $7 billion are subtracted, the remaining shareholder value is $23-28 billion, or $50-60 per fully diluted share. Over the years, our stock price has generally moved in tandem with the net asset value (NAV) we create, so I have full confidence in the market’s ability to keep up with the company’s steadily increasing NAV per share.
No discussion about value would be complete without the topic of risk mitigation. My job, and the job of our senior management team, is to create and deliver the highest risk-adjusted returns possible to our investors. I often believe that many investors do not fully appreciate how much risk there is in this industry and how well we manage it at Chesapeake. For example, in 2006 when natural gas prices are widely expected to decline to below $6 per mmbtu by late summer because of this past winter’s record warmth, we have hedged 71% of our 2006 natural gas production at $9.43 per mmbtu, 36% of our 2007 natural gas production at $9.85 per mmbtu and 22% of our 2008 natural gas production at $9.10 per mmbtu (excluding CNR hedges).”
So while on the books Chesapeake trades over book value, it’s actually trading at a 50% discount to Net Asset Value.
Some people may be worried about a hurricane destroying natural gas rigs. Well Chesapeake energy doesn’t need to worry about that either. None of their rigs are anywhere near the coast.
“I also emphasize that Chesapeake’s assets are all high and dry onshore in the U.S. In a time of what appears to be a cycle of greater hurricane activity in the Gulf of Mexico, many investors may not fully appreciate the very high risks that Gulf of Mexico operators and investors may face in hurricane seasons to come.”
Management is also aligned with the company. Chairman Aubrey McClendon has made numerous purchases of Chesapeake stock this year upping his stake to 26,676,064 shares worth about 778 million dollars. This is a great company with great management at a great price, you really can’t ask for much more.
Disclaimer: I own shares of CHK
Eric Schleien
zachary
teenmoney
josh4580
Carlton