NEW YORK (
) -- It looks like the M&A tricks worked by
CEO Aubrey McClendon in the past may have lost their magic ability.
Some trends in the energy stock trade have a history of consistency, and ones of those trades has been Chesapeake's proven ability to generate positive trading momentum for its shares by announcing deals that raise cash to work off the mountain of debt it has amassed -- the oft-quoted twice the level of debt of
for a company 27 times smaller than the world's largest oil company.
It looks like the low natural gas price environment and the ceaseless talk of a "one handle" futures quote (down into the $1s on the one-month futures contract) as being fated in the energy market, may now hold the trump card when it comes to Chesapeake's lack of market momentum.
Natural gas was down another 3% on Tuesday to just above the $2 mark, a day after
Chesapeake announced $2.6 billion in asset deals on the way to the $10 billion to $12 billion that the company plans to raise this year to put to rest concerns that its funding gap is too large to bridge.
The Chesapeake Energy M&A magic trade of the past didn't mean the long-term outlook for Chesapeake had changed, but it did show that when McClendon needed to go to the well to prove that his large collection of assets would be rewarded by strategic buyers, he usually didn't back empty.
Wall Street's reaction to Monday's deal was roundly positive, too, and while Chesapeake shares rallied in after-market trading, it was about as short-lived as a rally could be.
The market sell-off on Tuesday also made it a bad day for any company to attempt to gain momentum. Back in early January, when Chesapeake announced a joint venture in the Utica shale, it caught a good day and rallied twice as much as the market. And that was for a deal that it had really announced three months previous to adding the specific buyer's name in January.
It's not down by half of the market loss on Tuesday, though. In fact, Chesapeake shares were down more than twice as much as the
and even more than the broad energy sector decline of 2%, with its shares declining by 3% in afternoon trading.
There are details within the trio of deals announced on Monday that constant critics of the company can point to as more signs of financial engineering. Chesapeake signed another volumetric production payment -- or as the rating agencies and analyst Phil Weiss of Argus Research define it, "debt by another name."
The issuing of more preferred shares was also in line with the "financial engineering and off balance sheet debt," that Weiss said has has always been among Chesapeake's primary monetization strategies and should be viewed by investors with a raised eyebrow.
Yet the terms of the volumetric production payment (VPP) and preferred share deal were seen as positives, in a way. Weiss said the terms of the preferred were a little less favorable than previously offered to investors. Stifel Nicolaus wrote in a report that the $745 million VPP was at a "high price
that most likely includes the uplift provided by the liquids-rich nature of the Granite Wash and the likelihood of future commodity price improvement."
All of Wall Street was in agreement that the $590 million sale of assets in the Woodford basin to Exxon was a "nice surprise," not even on the radar of analysts as an asset play that Chesapeake could monetize.
Tim Rezvan, analyst at Sterne Agee wrote, "Chesapeake's announcement of three monetization transactions provides assurance that the perceived 2012 funding gap should be a non-issue ... the sale of 58.4K net acres in Oklahoma was not baked into our asset sale estimates and point to the depth of the company's portfolio."
Weiss of Argus Research said: "I agree the sale to XOM is a positive surprise."
However, the constant Chesapeake critic on Wall Street didn't miss the larger message the market was sending Chesapeake. "The market environment likely trumps everything," Weiss said. "To me, even if you're a bull, there's just not enough here for the market to get excited about. Macro concerns (economy, natural gas prices, lower oil prices) all trump any incremental positive here."
It could be that these deals weren't the "big ones" that the market will be moved by when Chesapeake announced them. Rezvan noted, "No news on Mississippi Lime joint venture, Permian Basin sale. We believe that these two deals, the biggest arrows in Chesapeake's 2012 monetization quiver, could raise $3-4 billion in cash and drilling carries. We expect to hear word on these deals by the end of the third quarter."
It's been written in the past that the Chesapeake Energy trade fits the market dictum that bad companies often make for the best trades, so maybe that dictum will be proven true again at the end of the third quarter.
It wasn't proven true on Tuesday, though and with as much as $10 billion more to go in its monetization plans, maybe the old, reliable Chesapeake Energy headline trade isn't as reliable as a bet on continued
low natural gas prices, which could hit $1 by the time the end of the third quarter rolls around.
-- Written by Eric Rosenbaum from New York.
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