Chesapeake’s Land Grab Strategy Can be Dangerous

-98.08%
Downside
88.90
Market
1.70
Trefis
CHK: Chesapeake Energy logo
CHK
Chesapeake Energy

Thanks to an aggressive land campaign over the last five years, Chesapeake Energy (NYSE:CHK) boasts the largest inventory of natural gas shale play leaseholds in the country (2.5 million net acres). [1] It is also the second largest producer of natural gas in the U.S., after ExxonMobil (NYSE:XOM). The company’s ‘Land Grab’ strategy is questionable, considering that if the company continues to collect the resources at this rate, then the leasing cash outflow may outrun the company’s 2012 operating cash by approximately $6 billion. [2]

Natural gas production represents 75% of the Trefis stock price valuation for Chesapeake.

Relevant Articles
  1. Will Chesapeake See Improved Results In 2019?
  2. Higher Oil Output And Better Pricing To Drive Chesapeake’s 3Q’18 Results
  3. Factors That Will Drive Chesapeake Energy’s Value In The Next Two Years
  4. Chesapeake Q2 Earnings Preview: Commodity Price Strength and Operational Efficiency To Drive Growth
  5. What Factor Is Driving Chesapeake’s Stock Rally?
  6. Key Takeaways From Chesapeake’s Q1

See the Trefis full analysis for Chesapeake

Various research houses are skeptical about the company’s strategy to continue to accumulate land rich in shale gas and liquids deposits because the company continues to have a high debt on the balance sheets as well there may be a considerable amount of debt, which is difficult to figure out as the company has a very complex ownership structure and also has miltiple joint ventures. Various investment research predict that the company may have a shortfall of anywhere between $4 billion to $9 billion to fund its extravagant land buying spree if it does not sell interest in some of its properties. The company has already spent a total of $3.1 billion in the first nine months of 2011 on leasing shale gas land.

While, some may argue that securing mineral resources for a mining company is good for it in the long run, the issue with natural gas shale deposits is the profitability of producing gas from the region. The abundance in which natural gas has been discovered in the recent past has kept its prices low in the open market, whereas drilling from shale deposits is an expensive process.

Chesapeake lets leases expire in Southlake

Chesapeake recently announced that it will let its drilling leases in Southlake expire and will not pursue drilling in the region. The company says that due to the increasing regulations and conditions, it was not favorable to set up drilling operations in the region, however the civic officials argue that the company is pulling out because of low price of natural gas in the market now. [3]

Chesapeake may sound reasonable in its argument here, however an aggressive leasing of natural gas rich deposits, where mining still may not profitable for the company concerns various analysts and investors of the company. It is essential for the company to moderate its approach and share its interests of land leases with other drilling firms. In our previous note on the company, we highlighted how Chesapeake is increasing its liquids production in pursuit of higher margins

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Company filings []
  2. Analysts critical of Chesapeake Energy for spending billions on gas and oil leases, including Ohio leases, Cleveland.com []
  3. Chesapeake Energy to let leases in Southlake expire, Star-Telegram []