Chesapeake owes money but it does not all fall due tomorrow. As of March 31, 2016, they had approximately $9.425 billion principal amount of debt outstanding, of which $1.625 billion matures in 2017 (including $344 million of maturities in January 2017, $902 million in May 2017 and $379 million in August 2017) and $878 million that matures in 2018 (10Q).
There are no worries until January 2017, at which time NatGas will be selling at its top price of the year. These paybacks can also be pushed forward if need be. There is always wiggle room.
To clear the road ahead, Chesapeake made deals with its bankers to extend its open line of credit for $4 billion to 15 June 2017 (10Q).
How are they gonna pay this back? First off, the $4 billion is not a loan. It is merely a guaranteed line of credit that Chesapeake can use if needed. But they do need to either renegotiate or pay $1.6 billion during 2017. They can pay it off with just the production coming from the Marcellus play!
On Page #4 of the conference call transcript, Brian Singer with Goldman Sachs ask:
"I wanted to just get some updates on how you're thinking about capital allocation and backlog in a couple of the natural gas plays. First, where you stand with curtailed wells and - or curtailed production as well as uncompleted wells in the Marcellus."
Frank Patterson answered:
"Hey, Brian. This is Frank Patterson. In the Marcellus, we're making about 1.8 billion cubic feet a day. We've seen a little bit of uptick in price recently, so we're doing well there. We have about 350 million cubic feet a day curtailed. These are wells that we can ratchet up as the market allows. And we have about 200 million cubic feet a day on wells that need minor repairs to bring back on line. So a substantial amount of gas available to us at a very, very minimal cost associated with that. And we'll manage that as the market allows."
"We have about 100 wells sitting back waiting to be fracked. So that would give us another 450 million cubic feet a day. So we have a little bit over a billion cubic feet a day available to us at a pretty reasonable cost."
According to the above, Chesapeake is now producing a 1.8 billion cubic feet per day in the Marcellus play alone with an addition 1 billion cubic feet per day available a reasonable cost. In other words, they could ramp up the Marcellus play to 2.8 billion cubic feet per day.
Let’s think only about Marcellus. Chesapeake hedged its 2016 production as reported on page #3 of their 1Q16 conference call:
"Since we last spoke to you in February, we've layered on additional hedges for 2016 to help increase our cash flow. We have approximately 476 billion cubic feet of our remaining 2016 gas production hedged at $2.71 and approximately 18.2 million barrels of our remaining 2016 oil production hedged at $46.32 per barrel, representing 64% and 69% of our Q2 through Q4 2016 gas and oil volumes respectively. We have also started to add some 2017 hedges at recent prices."
These hedges mean that Chesapeake’s profits are protected from a fall in both oil and gas prices. All the doomsday preachers are saying oil and gas will collapse. So what? It means nothing to Chesapeake with hedges in place.
You do the math. What is the gross sales of 2.8 billion cubic feet per day at the hedged price of $2.71 per million cubic feet? The numbers for Marcellus alone look astronomical to me, but you do the numbers yourself. I get dizzy around all those zeros.
The way I see it, the hedges and Chesapeake's high production is the main reason their banks extended the $4 billion credit line.
I know the banks and the major share holders are both smarter than the shorts. In fact, I think the shorts are downright stupid.
Aubrey McClendon, the former CEO of Chesapeake Energy, and the man credited for starting the fracking industry, purchased far too many oil and gas leases in 2013. He spent money like a drunken sailor. His board finally fired him. Then along came 2015 and the warmest winter on record. These two factors, one human stupidity and the other a force of nature, combined to put Chesapeake Energy in a financial jam. But this does not mean they cannot recover. As a reminder, Chesapeake was the #2 gas producer behind Exxon Mobil for years, and can easily made a comeback, especially if natural gas rises as expected.
Buying Chesapeake at $4.10 is a bet on the future of the US oil and gas business. If the oil patch turns north, you will make a killing. If not, put a stop-loss order in at $3.60. You could loss $0.50 a share, or you might make $29.50 profit because this stock is headed to $30 on the turn around. These are better odds than you can get with any stock on the market.
Don’t be a fool… get your toe wet Monday morning!
