Chesapeake's Debt Cut, More of the Same (CHK)

Chesapeake Energy Corp. (NYSE: CHK) has announced that it will reduce its long-term debt by 25% by the end of 2012 while increasing production by 25%. In its announcement, the company’s CEO said, “This plan represents a fundamental shift from our aggressive asset accumulation of the past few years to a multi-year period of asset harvest, characterized by a clear focus on capital discipline and maximizing returns.”  If this plan sounds familiar, that’s because it is.

In 2008, the company harvested assets worth $10 billion to cover exploration and capital expenditures that it made in that year and that it was planning for 2009. To be fair, Chesapeake has upped its proved reserves from about 12 trillion cubic feet of natural gas to 16.9 trillion in the past two years. In 2010, Chesapeake divested some 1.4 trillion cubic feet equivalent of natural gas, and still managed to boost its reserves.

To execute its latest “25/25 Plan”, Chesapeake plans to cut its debt by substantially reducing leasehold spending and by selling off assets. The asset sales will cut the company’s previously planned 30-40% production growth to 25%. The company also said that it would not issue any more common or preferred shares to hit its debt-reduction goal.

At the end of the third quarter, Chesapeake’s long-term debt totaled $11.5 billion. At the end of 2008, long-term debt totaled $13.2 billion, and at the end of 2009, long-term debt stood at $12.3 billion. A reduction target of 25% in the next two years comes to about $1.44 billion a year. That’s not out of line with Chesapeake’s performance over the past couple of years.

The company plans to boost its production of liquids, from about 59,500 barrels/day in 2010 to around 90,000 barrels/day in 2011. At a combined average price $60/barrel for natural gas liquids and crude oil, the increased liquids production would generate about $700 million in revenue. If all that were to be put toward debt, Chesapeake would still have to come up with at least that much again to meet its goals. The only way for the company to do that is to sell $700 million worth of assets each year.

If the company comes up a little short, maybe CEO Aubrey McClendon can kick in some cash. McClendon pulled in $114 million in compensation in 2008 and a paltry $18.55 million in 2009.

Chesapeake’s shares are trading up about 2% today, at $26.99 just at noon. The company’s 52-week range is $19.62-$29.22. In June of 2008, Chesapeake’s shares were trading at about $67 before falling to below $12 in December of that year.

Paul Ausick