Oil majors such as Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) may be forced to consider the purchase of Chesapeake Energy (NYSE:CHK) as shares of the natural gas producer continued their downward slide. Chesapeake has lost 30% of its market value since the beginning of 2012 as low gas prices and governance issues are taking a toll on the company’s stock price. Analysts are expecting that oil majors may consider bidding for the company, which is currently the second largest natural gas producer in the U.S. and sits some of the most lucrative onshore reserves in shale plays across the country.
A move to take over Chesapeake’s operations could result in a major additions to the natural gas and NGL liquids output of the acquiring firm. Exxon Mobil boosted its presence in shale exploration with the $31 billion takeover of XTO Energy in 2010.
We have a $94 price estimate for Exxon Mobil, which is at a 15% premium to its current market price.
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Chesapeake has been rocked by a series of problems that have caused its stock to nosedive in 2012. The company reported a surprise loss in the first quarter of the year as natural gas prices fell to their lowest levels over the past decade, hurting its core business of gas production. Then, questions over the company’s corporate governance and its problems in raising cash to finance its proposed push towards liquids production have put a further strain on its stock price.
The company faces a cash shortfall in excess of $10 billion in its bid to finance an expansion into oil rich plays and its stock price has fallen by 47% over the past 12 months, lowering its enterprise value to $29 billion, roughly coming up to $9.2 for every barrel of energy equivalent (BOEE) in its proven reserves, which is at a steep discount to the industry median of $15.5 / BOEE.  Such a low valuation should attract oil majors, who anticipate a broad recovery in natural gas prices in the long term.
Despite the lucrative valuation of Chesapeake’s reserves, the company’s complex structure and unconventional financial practices could deter potential buyers.  Even then, the company holds some prime assets in multiple shale plays across the U.S. and has a strong asset sale machine. Analysts argue that if the discount over its assets is large enough, buyers will agree to takeover the company despite the convoluted financial structure.
Exxon, which has already indicated that it holds a long term favorable view of natural gas market in the U.S., is a likely potential buyer for Chesapeake. Exxon and Chevron were late entrants in the unconventional exploration sector in the U.S. and have increased their presence in the industry through acquisitions. Acquiring Chesapeake will have a major impact on the reserves as well as output levels of the purchasing firm.
- Chesapeake CEO Found Running In-House Hedge Fund (trefis.com)
- Chesapeake Worth $28 As Shift To Liquids Mitigates Natural Gas Prices (trefis.com)
- Chesapeake Valuation Seen Luring Major Oil Merger Deal: Real M&A, Bloomberg [↩] [↩]