|Credit Crunch and Sinking Prices Threaten Chesapeake Energy's Growth|
>>>Not unbelievable at all that CHK and XTO are trading at these levels. What you expect is that the news media and your investing peers would take the time to become as well educated as the denizens of this board. That expectation can lead to heartache and financial loss. The foolishness of others remains part of the big picture. Sad but true.<<<
OCTOBER 10, 2008
By BEN CASSELMAN
Chesapeake Energy Corp. is scrambling to sell assets and cut costs as falling energy prices and tightening credit threaten to derail the company's dramatic growth.
The Oklahoma City company has spent aggressively and borrowed heavily to fuel its climb this year to become the largest U.S. natural-gas producer. Its efforts were supported by natural-gas prices that leaped to a high of $13.577 per million British thermal units in July before fears of a supply glut sent prices plunging. Natural gas settled at $6.825 Thursday on the New York Mercantile Exchange.
Now Chesapeake is dramatically cutting back the costly land-leasing program that defined the company's rocketing growth.
It also faces the difficulty of trying to sell some of its gas-producing properties in South Texas in what has become a buyers' market. The sale is on top of other asset sales and spending cuts Chesapeake announced in September.
Charles Maxwell, an energy analyst who sits on Chesapeake's board, said the company suffered from "an excess of enthusiasm" when prices were rising earlier this year.
"I didn't think it would come to this," Mr. Maxwell said, adding that he believes the company's long-term prospects are solid.
Chesapeake co-founder and chief executive Aubrey McClendon said his company expects to end the year with $5 billion to $6 billion in cash -- enough to keep growing without tapping the capital markets.
The company had no cash at the end of the second quarter.
"We can continue to be the number one driller in America, the number one leaser in America ... because we're a big company, we generate a lot of cash," Mr. McClendon said.
He added that the company has insulated itself from falling natural gas prices with a hedging program that has effectively locked in an average price of $9.25 per million BTUs for 75% of its expected 2009 and 2010 production.
Nonetheless, Chesapeake's dilemma drives home how the credit crisis is threatening the business model of many independent oil and gas producers in the U.S. -- a model Mr. McClendon helped create. As gas prices rose and new technology unlocked vast new reserves of oil and gas, companies leased millions of acres of land, often at sky-high prices, and counted on being able to borrow money and sell shares to get the money to drill it.
Chesapeake was especially aggressive, at one point planning to spend $18 billion in 2008, more than three times its operating cash flow. Last spring, the company raised more than $3 billion in debt and equity despite promising the previous fall not to tap the capital markets "for the foreseeable future."
Chesapeake's shares hit a high of $69.40 on July 2, up 77% from the start of the year. Its shares closed at $17.97 Thursday on the New York Stock Exchange.
The extensive drilling by Chesapeake and its peers led to fears in recent months of an oversupply of natural gas, sending prices tumbling.
Mr. McClendon said the company will spend less in the future, but only because it's already got most of the land it needs.
But that land is only valuable if companies have the money to drill it -- and a growing number of analysts are skeptical that Chesapeake and some of its peers will be able to find enough money to drill all the land before the leases expire.
In recent weeks, a series of companies have announced billions of dollars worth of cuts to their capital budgets. Chesapeake itself led the way, announcing Sept. 22 that it would cut its capital budget by $3.2 billion, or 17%, through 2010. The company also said it planned to sell $1.75 billion worth of assets on top of the nearly $7 billion of assets the company has already sold this year.
Mr. McClendon said the company is slowing its acquisition of new land and plans to cut about a quarter of its 4,000 land men, private contractors hired to lease land on behalf of the company.
In Louisiana, where Chesapeake helped create a leasing frenzy earlier this year, the company's leasing has all but stopped, according to attorneys representing landowners there. The company has scaled back even further in Pennsylvania, where Tom Murphy with the Penn State Cooperative Extension says Chesapeake has canceled some leases before they have been finalized. Mr. McClendon said Chesapeake has delayed lease agreements, but denies canceling any signed deals.
"There are a lot of disgruntled individuals who thought they had a deal on the table and didn't realize the company had an out," Mr. Murphy said.