# Chesapeake Energy (CHK)



## larry81 (Nov 22, 2010)

- price below book
- single digit p/e
- natgaz at 15y low
- chk at 1y low
- well run company
- i like energy for mid/long term
- buy when there blood in the street

anyone else looking at this ? value play or dog ?


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## PMREdmonton (Apr 6, 2009)

Yes, this company has a lot of promise.

The trouble is they have a CEO with a gigantic ego who takes excess risk with leverage and who demonstrates extremely shady moral compass and ethics in his treatment of the shareholders. He basically wiped himself out during a margin call in the economic crisis but got the BOD to give him a sweetheart compensation deal after the fact. Now he has worked some sort of odd deal where he was given a WI in some wells that CHK owns and now has used that as collateral in a loan which has potentially raised the issue of a conflict of interest between what benefits him and what benefits the shareholders of CHK.

If you could get rid of McClendon this is a great company to invest in right now.

Even with him they may still be a fine company. They have lots of assets and many of those assets are actually oil assets and not NG assets which most people on the street don't understand. It is just that most of their current production is in the NG space but even that is rapidly shifting.

I think you'll do fine if you buy here but I try to avoid bad corporate governance (see SJR).

Instead, why not buy Peyto or ECA? Both of these companies have favorable metrics as well with even better dividends and much better corporate governance.

If you want US unconventional land assets you could always consider Sandridge instead.


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## gibor365 (Apr 1, 2011)

S&P has buy recommendation with 12 mo target $30, but on other hand gives just $20 fair value.
As mostly dividend investor I like low payout ratio, but don't like low yield


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## GOB (Feb 15, 2011)

Great option premiums on this stock right now. I sold a Jul $17.00 for about $150. If I get assigned its at a $15.50 cost basis which I am quite confident I'll be able to write covered calls on and/or sell the stock for a relatively quick gain.


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## PMREdmonton (Apr 6, 2009)

Good strategy - way too many assets for it too fall down too far and many of those assets are oil based and not NG based. I like this options strategy on this one. I wouldn't mind holding it if McClendon is dismissed but I could certainly get into trading on this one with all the pessimism in the air.


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## larry81 (Nov 22, 2010)

I am about to take position !!!

Anything under 20 is a steal !


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## PMREdmonton (Apr 6, 2009)

I just wanted to post this for all those considering CHK.

CHK is a great company with a terrible CEO.

The company arose to greatness because of the business accumen of a guy named Ward and the salesmanship of a guy named McClendon. Both were risk takers and built this company up on the thesis of a NG revolution through fracking. And they were right - it did happen.

However, Ward became disenchanted with McClendon and decided to go his own way and formed Sandridge Energy and also built himself a bunch of NG assets. However, Ward saw the crash in NG coming before everyone else did and gutted the company of all its NG assets and then went bought some oil assets in Mississippi. He then went and bought himself a bunch of assets for light oil land leases that no one was interested in the time in a shallow well area for about $400M ($200 per acre for 2M acres). His problem was leverage so he then sold 25% of the land assets he bought for about $2B or so if I remember correctly implying that he got $1.6B cash and 75% of the land net out of the deal. Now his big problem was getting operational cash flow to drill. So he took the money he had and bought shallow water wells and land in the Gulf of Mexico after the deepwater well went down and no one wanted to touch it giving him 25K BOE day. He could then use the cashflow from this operation to fund the drilling program on all the acreage he got. The wells needed in the new acreage are very cheap to do and the company now has a ton of land to drill over the next 10 years.

So basically by going the SD route instead of the CHK right you get a visionary CEO who has morals, an operational oil company with a ton of land assets. The only downside to this stock is the leverage (D/E of 1.73) he employed to get this whole thing going but he plans to pay it down as he gets his wells going. Right now it is also on sale because the market is afraid of leverage again.


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