At this point, we all know Chesapeake Energy Corporation (NYSE:CHK). During the boom and halcyon days of the fracking revolution, CHK stock was one of the biggest natural gas firms out there. You name a shale formation, Chesapeake was there, fracking away. And during the boom, its production was rivaled by only a small handful of E&P firms.
But in order to command such a hefty size, CHK took on a lot of debt. And we all know how the market reacted — and is still reacting — to all of those IOUs on its balance sheet.
And while, Chesapeake has ground forward with its debt plans, those debts are still proving to be a pain for the firm and its investors. Namely, it’s getting left behind in the shale race.
With major rivals starting to score on the deal-making front, CHK stock risks beginning tossed into the dustbin of shale producers. The natural gas firm needs a deal, and it needs it fast.
A Major Deal That CHK Stock Missed Out On
When it comes to natural gas, the Marcellus shale is where it’s at. And those firms that moved first in the region have done amazingly well in terms of acreage positions and low costs. CHK was one of those firms. However, rivals including both EQT Corporation (NYSE:EQT) and Rice Energy Inc (NYSE:RICE) have done a better job of capitalizing on the region.
Both firms have continued to rack up impressive acreage positions in the region, mega-midstream assets and have continued to have supportive share prices through the current energy malaise. So naturally, the two natural gas players have decided to hook-up in a $6.7 billion buyout.
By doing so, EQT will boost its core acreage in the Marcellus Shale to nearly 670,000, while its assets in the Utica shale region would jump six-fold to 616,000 acres. In the end, the combination would create one of the lowest-cost and largest natural gas producers in the country. A deal which EQT CEO Steve Schlotterbeck was quoted as saying would be “unmatched in the industry.”
That should send shivers down CHK shareholders spines.
For one thing, Chesapeake has long been considered for a buyout in the energy patch. Thanks to its enormous asset position and strong leadership position in natural gas, M&A rumors have targeted the firm what seems like a decade. That included plenty of majors like Chevron Corporation (NYSE:CVX) and BP Plc (ADR) (NYSE:BP) eyeing up the shale leader. CHK has been long considered a prize for the majors.
However, those buyouts haven’t come.
Thanks to its continued debt balance and its shrinking asset portfolio to pay for those balance, CHK was simply not as attractive someone like BP or CVX anymore. And with the new RICE/EQT deal, it turns out that Chesapeake might not even be attractive to smaller rivals looking to grow into larger firms.
Part of the reason is why pay for all of Chesapeake when you can buy the chunks you want through its continued asset sales and avoid all the debt that comes with the stock? This year alone, CHK stock has plans to dump an additional $3 billion in assets to shore-up its balance sheet. To meet its debt-to-equity ratio goals by 2020, analysts peg that the firm will still have to unload more over the next couple of years.
Passing Chesapeake By
M&A in the energy sector totaled $140 billion during the first quarter. That’s a big jump over last year and is the largest sector by dollar amount. And the dealmakers have included ever segment of the market and even some players who have struggled in recent years. Heck, even beaten-down oil sands producer Cenovus Energy Inc (USA) (NYSE:CVE) did some buying from ConocoPhillips (NYSE:COP).
The problem is, CHK’s rivals have started to move and move fast. That puts a ton of pressure on Chesapeake. On one hand, completion is getting harder. As its rivals grow, drop costs and produce more, CHK is going to have a hard time matching that. Moreover, shareholders are going to have a hard time staying with a struggling stock when they could be EQT and get a growing producer with real profits.
On the other, the “CHK is buyout target” narrative is getting old. And given the current climate, may not happen at all. As much as I think CHK stock is a value, some of that though the process is that someone will want its production. But that continues to be not true. How much longer will shareholders put up with that? I am guessing not long.
In the end, CHK stock needs to do a real deal to compete — either spending some cash to buy someone or finally putting itself up for sale as a whole. However, given its debts, neither scenario looks super likely at the current moment.
The Bottom Line
Chesapeake needs to get something going for itself. Its rivals have used the current energy environment to grow and CHK is still fighting the demons of its past. For investors, that’s something to consider when looking at its value proposition.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.