Aubrey McClendon has had a tough week. As the West Virginia State Journal characterized it, he got burned like a poker player who went all in on his hand and failed to get the cards. Having once owned approximately thirty million shares of Chesapeake stock valued at nearly $2.1 billion, shares purchased on margin were called and he had to sell almost his entire holdings to cover what he owed. Ouch!
Now, not even a liberal like myself wishes that kind of hardship on a person. (Steve Hunt, on the other hand…) We at TheLostOgle appreciate the vast number of Oklahomans the row team loving, Thunder owning, Rand Elliot supporting, Duke alumnus employs at the Chesapeake compound that borders Nichols Hills, and wish him the best of luck in rebuilding his stake in his own company.
In the meantime, we have acquired a memo he sent to all of his employees in an attempt to allay the fears said employees probably have right now. Unfortunately, the letter is so long that I think it’s too long, and is immersed in a lot of business jargon. So, as our service to you, we have translated to letter for easier understanding. Find the letter after the jump.
Dear CHKers: As you no doubt have observed, the world around us is changing daily, and not for the better – that is especially true in financial markets, where the current meltdown is having profound implications on our industry, on our country and around the world. The challenges our industry, country and world faces are daunting – however, among the three, I would prefer to have to deal with those of our industry, whose primary challenge is a combination of lower oil and natural gas prices, tougher credit markets, and, as a result, substantially lower stock market valuations – the country’s and world’s problems seem more intractable by comparison. Our company has not been immune to these challenges as several members of our bank group have been bought under duress recently, one of them went under (Lehman), and others are just plain struggling to stay in business.
While this probably isn’t the best time to remind everyone of our stock abbreviation, I’m going to refer to you by that designation because, well, it’s the only way for me to start colloquially enough to make it feel like I’m not about to sound the panic alarm. Speaking of panic alarms, things suck right now. Did you hear that Barack Hussein Obama is going to be President?
The biggest challenges facing the big financial institutions are twofold: first, the biggest ones hold lots of illiquid financial derivative “assets” that few people know how to value and these assets currently have very little resale value or liquidity. Second, these large financial institutions’ ability to conduct business relies on the confidence that their peers must have in doing business with them – this is called “counterparty risk”. In normal times, most companies and big financial institutions don’t think twice about doing business with another big financial institution, now most people worry if they can get their money out of a transaction with one of these big financial institutions because they have no idea about the financial status of the counterparty.
As for why things suck, let’s just blame the banks. Banks own a bunch of crap that is probably worthless, and now they don’t have any money. How’s that for irony? Also, if you know a place where I can put the $350,000,000 I have left after losing most of my money, give me a call.
On the other hand, our company has “real” assets: natural gas and oil properties that produce products that are vital to modern human existence and that are easily valued and readily saleable for cash, both on a monthly basis and in the A&D market in bulk. In fact, we believe we have the nation’s best natural gas assets and they form the foundation of our position as the nation’s #1 natural gas producer. Our 36,000 wells produce every day and every month and we are paid cash for that production by reputable end users – companies such as utilities, industrials, pipelines, etc. The price of natural gas is set by many factors, but primarily by seasonal demand patterns that are driven mostly by unpredictable weather patterns – it’s pretty simple actually, cold winters and hot summers bring higher nat gas prices and warmer winters and cooler summers bring lower nat gas prices. To reduce our exposure to those pricing swings, we hedge (or “lock in”) a large percentage of our natural gas and oil production, often with the same financial institutions I described above, which these days is a bit disconcerting. Even though we are exceptionally well-hedged, it’s hard to ignore that natural gas prices have declined by 50% in the past 90 days and oil prices are down almost as much.
Hey, I’m as surprised as you that our stock is pretty close to worthless. Considering we basically have all of our product hedged, the decline in price should make very little difference in our revenue or cash flow. Besides, remember what your ONG bill looked like last Winter? Well, it’s about to get cold again, and even with the drop in natural gas prices, it’s still going to be more expensive this year. I don’t care if the global economy is down, you think just because the governor of Alaska is a celebrity now people are going to start acting like Eskimos? Yeah, didn’t think so.
So, where does this all leave us as a company? Actually, despite a ridiculously low stock price, in excellent shape. We have over $1 bln of cash on hand and we are well hedged at prices significantly above current prices with counterparties that are generally among the strongest still standing. We will generate almost $6 billion in cash flow in 2009 (or about $10 per share) and about $6.7 bln in 2010 (or about $11 per share), plus we have asset sales planned in each of 2009 and 2010 of several billion more. In addition, we have several property sales and joint venture initiatives under way that should allow us to end the year with even greater liquidity than we now enjoy.
Here are some numbers. They probably mean about as much to me as they do to you. But people like numbers. Personally, my favorite number is 4, because that was the number both J.J. Redick and Carlos Boozer wore. Go Blue Devils!
Although we are in a strong position financially, in tough times such as these, we all need to be more careful with expenses. It is imperative that we negotiate lease prices reflective of today’s economic conditions. So make sure you negotiate everything extra long and hard. What was a fair price 90 days ago for a lease is now overpriced by a factor of at least 2x given the dramatic worsening of the natural gas and financial markets. The same is true on drilling, completing, operating and overhead costs – in fact, everything that we do everyday to run this business should have a sharper focus on cost control and all of us can help in that regard. Together, we will emerge from these trying times as a stronger and even more efficient and successful company. For those who are relatively new to the company, look at our stock price chart from the late 1990′s – we’ve been through tough times before, in fact, much tougher than today, and prospered and became the industry leader we are today.
Heh, heh. I said “long and hard.” Also, “drilling.” Seriously, it’s in there.
Finally, let’s talk about the stock price, and what can I say? It’s ridiculous at a multiple of 1.5x 2009 cash flow, but it’s real and my advice to all of you is just to ignore it. There is nothing that either you or your management team has done to reduce the value of the company by 80% in the past 90 days and 65% in the past two weeks – it’s just investors in full scale panic across the globe right now, selling whatever they can. Over time, the stock price will take care of itself, but in the meantime, just ignore it – it does not reflect how well we are doing as a company.
Pay no attention to the man behind the curtain. Seriously, if something doesn’t make you happy, just tell yourself it isn’t true. I learned that in a book that was endorsed by Oprah…so you know it is legit.
So, while all is not well in the world at this moment, Chesapeake financially and operationally is actually doing very well. So let’s keep our heads down, sharpen our pencils, tighten our belts, lower leasing and drilling costs, ignore the stock price and instead stay focused on how much net asset value the company is creating for our shareholders, how much natural gas and oil we are producing, reducing our finding costs, growing our reserves, identifying top notch JV partners, etc – in short, attending to those things that we can control, and ignore the stock price, something we can not control.
I like cliches. They’re what my old lacrosse coach used to call “inspirational.” Plus, I’m serious about that pencil thing. We’re going to have to start using those things to save money. I’m talking No.2. Don’t let me catch you expensing Pentel mechanicals!
I hope you have a great weekend, and I appreciate your hard work and that of your colleagues on behalf of our shareholders. I am proud to be your CEO and promise to continue to direct this company with all the energy and enthusiasm that I’ve had since we began Chesapeake in 1989.
Yeah…I’m going to need you to come in tomorrow.
The K stands for “Kerr”…did you know I’m a member of the Kerr family? Because I am.
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