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Chesapeake Energy Continues to Shore Up Its Balance Sheet

The company’s cash flow is still holding up with OCF in at $1.4B, basically even from last quarter and up about 25% y/y. CHK is slowly working to cash flow neutral as they only outspent OCF by $300M, compared to over $1.2B back in 2007.

After the credit crisis, management started paying attention to its balance sheet and liquidity. Cash jumped to $2B (from zero in Q2) and for the first time since I’ve owned them, their current ratio is over 1.0. Also, the company drew down the rest of its credit facility ($1B available at Q2 08) and put it into money-market funds, Treasurys, etc., on worries the banks may not have the money when needed. Keep in mind CHK has roughly $5B in off-balance sheet future obligations due to equipment leases, VPP purchase obligations, etc.

The income statement reflects the huge swings in nat gas prices and the related hedges that CHK have on. Operating expenses are down slightly from last quarter and on the conference call, that’s a trend that management said should continue as the industry tamps down capacity.

Chesapeake seems to be managing the credit crisis well. As of the 10-Q filing on Nov 6th, CHK had $800M cash on hand. Their midstream subsidiary obtained a $460M credit facility, with $378M remaining. The company also transacted a few small debt redemptions and modifications.

Subsequent to Q3, Chesapeake announced another JV, this time in the Marcellus Shale with Statoil (STO). This transaction nets them $1.3B cash upfront with STO paying the majority of the exploration costs to exploit the assets up to $2.1B . I direct readers to the press release for more details.

In summary, management has recognized that the market will continue to punish CHK until its fiscal house is put in order. CEO McClendon and team are executing the plan to do just that. In addition to the STO/Marcellus transaction, CHK is still trying to close sale of additional assets in South Texas and another VPP transaction. Meanwhile, production is humming along — Haynesville has already exceeded previous stated targets of 75 mcfe/day — and proven reserves were down less than one percent despite the various asset divestitures. Impressive.

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