Chesapeake Energy Corp. (CHK): VPP news expected, but may begin to narrow discounted valuation - Goldman Sachs - Jan 2, 2008
News
Chesapeake announced it closed a volumetric production payment, receiving proceeds of $1.1 billion for 210 Bcfe to be delivered over 15 years.
Analysis
The proceeds and reserves are in line with our estimates. However, we believe the headline sale price at almost $5.25 per Mcfe of proved reserves could be perceived positively. Chesapeake is still responsible for the costs of production, and as such, we expect controversy over the extent to which this will improve the company's credit ratings. We believe the ultimate success of this deal will be in the company's ability to show improved rates of return from reinvesting the proceeds in drilling.
Implications
We believe Chesapeake remains focused on using asset sales to help finance its aggressive drilling program, and further near-term monetization announcements could also be perceived positively. At 5.4X 2008E EV/debt-adjusted cash flow, Chesapeake shares
trade at a discount to the 5.6X-7.0X range of other large E&P growth stocks. In part Chesapeake's aggressiveness in drilling and past acreage investment is responsible for this discount, in our view. We see Chesapeake's multiple expanding if results from emerging areas such as the Fayetteville Shale and Appalachia are positive and, more important, there is greater confidence that the company can spend within its cash flow. We believe near-term catalysts from monetization announcements that could improve Street thinking make the stock attractive, as does our bullish view on natural gas. We rate Chesapeake Neutral relative to an Attractive coverage view. Our price target is unchanged. |
