Article from the wall street journal:
Heard on the Street
Bulls, Bears Facing Off
Over Chesapeake Energy
By GREGORY ZUCKERMAN
Staff Reporter of THE WALL STREET JOURNAL
In today's wild and woolly stock market, it remains
dangerous to bet on, or against, momentum investors.
Just ask shell-shocked shareholders of Chesapeake
Energy.
Skeptics long derided the Oklahoma City-based oil and
gas producer's goal of using horizontal drilling to profit
from a big oil and gas deposit known as the Louisiana
Austin Chalk. So dubious were fellow industry
executives that many of them sold the company's stock
short, borrowing and selling Chesapeake shares in the
conviction that the stock would tumble so they could buy
it back at a profit.
But momentum investors became enamored with the
growth story promised by Chesapeake's charismatic
38-year-old chief executive, Aubrey McClendon.
Chesapeake went public at a split-adjusted 1 3/8 in
1993 and traded as high as 34 7/16 in November 1996,
costing short sellers a pretty penny.
Then the music stopped. Speculation that the Chalk bet
was hitting trouble was borne out late in June when the
company took a roughly $200 million write-off. The
move accelerated a free-fall in the stock, as momentum
investors deserted, causing Chesapeake's market
capitalization to lose a startling $1.8 billion. Chesapeake
closed at 7 5/16 Thursday.
Now, the bulls and bears are gearing up for what could
be a final showdown. Chesapeake's new strategy is to
slow spending and focus on its more successful Masters
Creek area of Louisiana. Investors have begun valuing
the stock like any other in the industry, based on net
asset value rather than wildly optimistic growth
projections.
Investors await a report detailing Chesapeake's reserves
and expenses to be released next week, along with
year-end earnings. Rumors that the reserves report will
prove worse than expected have sent some investors
running for cover, even as more adventurous hedge
funds and bottom-fishers show signs of interest, causing
bursts of heavy trading volume.
Analysts expected the independent report to be released
in late July or early August, and then worried about the
apparent delay. Some industry analysts heard that
Amoco or another company could make a takeover bid;
rumors, apparently false, spread that Chesapeake was
having trouble paying its bills.
Chesapeake strongly denies that it faces a cash crunch,
says it isn't for sale, and insists that the reserves report
won't dictate its fate.
"I don't see how a company with $300 million in cash
and investments could have a problem paying its bills,"
says Mr. McClendon. Oil-service companies confirm
that Chesapeake is paying its debts. And a March bond
sale should tide the company over for at least a year.
Mr. McClendon denies suggesting that the report would
be released before the end of August, explaining that
analysts were "confused." Last year, Chesapeake's
reserves results came out on Aug. 29.
The stakes are high, involving both the stock's outlook
and quite a few Wall Street reputations. Fidelity
Investments, the nation's largest mutual-fund group, held
roughly 15% of the company's 70.3 million shares on
March 31, initially boosting its stake as the stock
weakened, but then retreating to 6.5% by June 30.
Pilgrim Baxter & Associates and Neuberger & Berman
Management also have been big holders, with
Neuberger boosting its stake by one-third to almost five
million shares between March 31 and June 30.
Analysts at several top Wall Street firms claim the
dubious distinction of placing buy recommendations on
Chesapeake before the shares soared, and never
removing them. Bullish support comes from Prudential
Securities, J.P. Morgan Securities and Donaldson Lufkin
& Jenrette, all of which helped underwrite the company's
stock and bond sales, raising eyebrows on Wall Street.
"Underwriters always like a stock, or they wouldn't
underwrite it," explains J.P. Morgan's Michael Cha.
"Chesapeake made a big bet and were wrong, and now
we're waiting for the year-end numbers to reassess our
position. I don't think anyone has been aggressively
pushing the stock around here." Analysts at Prudential
and DLJ weren't available for comment.
Bulls insist that existing drilling properties could prove
profitable, helping shares recover. But some independent
analysts warn against buying the stock above 5, at least
until the reserves data are out. Chesapeake has about
three times as many "proved, but undeveloped" reserves
as do competitors, which reflects an aggressive booking
of reserves, says Michael Spohn of Petroleum Research
Group.
"Chesapeake is the epitome of Wall Street pumping up a
company that will need to raise a lot of capital; a sale
might be a strong option, because they'll probably have a
hard time selling themselves to investors again," Mr.
Spohn says.
Chesapeake Energy
Business: Oil and gas development and production
Nine months ended March 31, 1997
In millions
1997
1996
Revenue:
$205.79
$99.94
Net income:
$34.41
$16.00
Share earnings:
$0.50
$0.28
Latest quarter (March 31, 1997):
Per-share earnings: $0.22 vs. $0.13; average daily
volume: 1,313,814 shares; shares outstanding: 70.3
million; trailing P/E: 10; dividend yield: 1.1. |
