(UPDATE) Chesapeake Energy To Reduce High-Risk Exploration Strategy
Dow Jones Online News, Friday, August 29, 1997 at 16:20
NEW YORK -(Dow Jones)- The former high-flying Chesapeake Energy Corp. is now recasting itself as a down-to-earth oil and gas operation.
Chesapeake's fiscal fourth-quarter results, released Thursday after the markets closed, confirmed the fact that the company's bubble had burst. The final pretax write-off was $236 million, causing a fourth-quarter loss of $2.97 a share, compared with earnings of 12 cents a year earlier. The results were roughly in line with Wall Street expectations.
The biggest disappointment was the total of the company's proven oil and gas reserves: the equivalent of 403 billion cubic feet of gas, down 5% from a year earlier. The company didn't detail how much it lowered its reserves in Louisiana, but the drop in reserves was surprising given the hundreds of millions of dollars spent on land and drilling.
"We are reorienting more toward development and less toward exploration," Chesapeake Chief Executive Aubrey McClendon told investors. That means fewer high-risk exploration plays of the sort that had once defined the company.
Shares of Chesapeake (CHK) finished up 43.8 cents to $8.563 Friday on the New York Stock Exchange on what some analysts said was short- overing. McClendon also said the company had received takeover inquiries again fueling speculation that the company may be bought, observers said, which helped support the stock price Friday. A few weeks ago, rumors circulated that Amoco Corp. (AN) would buy Chesapeake.
Michael Cha, an analyst at J.P. Morgan Securities Inc., said he now estimates oil and gas production will grow at 15% to 20% a year. That's not bad for a small oil-and-gas company, except when compared with its previous growth rates of 50% or more. Chesapeake's high-flying days may be over.
"They're going to be more coventional now," said Cha, who rates the stock a buy. "I don't think they want to be the golden child anymore."
The stock market also appears to have stopped giving Chesapeake credit for future drilling successes that have yet to be proven. "Now, Chesapeake has come back into the fold of being an oil and gas company. Before, they were like a biotech company," said Kenneth Beer, an analyst at Johnson Rice & Co.
It is a significant change for a company whose growth and optimism intensely divided fans from skeptics. "This one brings out everyone's emotions," Beer said.
Up until this spring, the Oklahoma City company had been a high-risk, high-growth story of the kind usually found in the technology sector. Between mid-1995 and early 1997, the stock price more than quadrupled, adjusted for splits.
All that changed earlier this year, as disappointing exploration results plagued Chesapeake's core growth areas in Louisiana. In late June, the company said it would write off much of its Louisiana gamble to the tune of $200 million before taxes, and the stock tumbled.
Chesapeake made its name with fast, risky drilling in the Texas part of the Austin Chalk Trend, a long, underground formation trapping oil and gas. The reliance on lots of shallow wells required frequent success, which it experienced. For example, Chesapeake's earnings during calendar 1996 rose to $10.3 million from $5.5 million.
Expecting similar results, the company moved into the Louisiana part of the trend in late 1995. It bet big on Louisiana, buying up more than 1 million net acres.
But the geology was different. Apart from an area known as Masters Creek, the Louisiana land disappointed, turning up dry holes and uneconomical wells. It was an unlucky break exacerbated by a high-risk strategy.
"It may have been imprudent to have done that so quickly and so aggressively. Their error may have been that they took too big a swing
for a home run," said Morgan's Cha.
The company, which has roughly $200 million in cash, said it will raise $100 million to $125 million in fiscal 1998 by selling some strategic investments, the largest of which is its 39% stake in Bayard Drilling Technologies Inc., a drilling contractor that plans to go public. Bayard expects to sell 8.95 million shares at $16 apiece in the offering. |
