Do your own due diligence.
The numbers above are for TEV/AEBITDAX not TEV/EBIT.
IMO it is the cheapest > 1bn dollar equity cap idea in the market today.
Chesapeake energy emerged from bankruptcy (“BK”) a couple of days ago. Chesapeake is one of the largest independent gas producers in the United States. The company has been completely transformed during the BK process; it has barely any debt left for a Co. its size and has reduced cash costs by almost 50%. Importantly, all of the garbage that may have been in the company would have come out to the light during the BK process and consequently has now been cleaned up.
If you don’t know how BK’s work here is a quick primer:
Super expensive BK lawyers and fin advisors are hired to guide the Co. through the BK. The company then declares bankruptcy. Management fires a bunch of people, says it can’t pay off a hell of a lot of debt, and says it can’t honor a bunch of contracts. The different classes of debt holders have their own financial advisors and lawyers that the Co is likely also on the hook for battling it out to try to screw holders out of what the company owed them so that they can end up with a bigger portion of whatever remains. The BK court approves all of these moves to give the entire proceeding an aura of legitimacy as opposed to showing the battle royal that it is. In the background, BK lawyers and fin advisors are paying themselves a ridiculous amount of fees which once approved by the court can’t be challenged and most importantly management is restructuring its compensation package.
Since management wants subsequent shareholders to believe that they are doing a good job they provide a set of projections alongside the restructuring advisors that an 18 year old with a gardening degree could beat. The point of this is to have the options package that they (management) receive kick in at the lowest possible valuation and thereby have the highest possible compensation for themselves down the line. Pretty nice gig if you can get it.
On the topic of management teams, the geniuses at CHK made sure to hedge 80 pct of 2021 production at around 42 bucks a barrel. Oil is at 60. Had they done NOTHING with their “hedging”, into which I am sure they put in a hell of a lot of thought, revenues would be 40 pct higher, but hey that is why they have worked in the oil industry for decades and get paid the big bucks. Fortunately, they have not hedged too much of 2022 production and that is where the juice is. This sets the company up for a mediocre 2021 and a great 2022 at current gas and oil prices. This should set up management beautifully too.
So, to summarize how we got here. The first lien debt holders used the chaos caused by negative 40 dollar oil market to take away the company from the other debt holders. Now that the world is not over despite politicians’ best efforts; people still need energy. Nat gas in the Midwest is up 30 times in a week. Germany is importing energy because windmills can’t produce enough. Maybe just maybe 2021 will not mark the end of fossil fuels.
Cheat sheet. (Do your own numbers, mine could be full of mistakes and most likely ARE)The 2019 2020 #s are jumbled up. AEBITDAX is for Q3LTM. Market cap is year end 2019,etc
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Commodity market metrics ****
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Cash operating costs / barrel
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Total operating costs / barrel
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in millions except for Price / Change / x
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137 mln if diluted by warrants
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***** In LTMQ3 2020 CHK made 1.44 billion in adjusted EBITDA. That was with gas 11 pct lower and costs 50 pct higher. If you assume 20 pct lower production in 2022, current gas prices and current costs you get 1.66 billion in adjusted EBITDA assuming no changes in assets and liabilities, no other revenue, 100 mln in interest expense, and 10 million in other items. (I have taken a lot of liberties in these projections)
I believe that the Co. deserves a much higher multiple than it used to have as everyone has known for YEARS that it was under threat of going BK due to high leverage.
The stock is very illiquid and as soon as volumes pick up expect a lot of selling from term loan holders (people that went through the restructuring) that will be selling their positions.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Somone putting it on r/wallstreetbets. I don't have any karma on reddit.
If you can post on WSB buy your position and post this. If you are feeling generous you can attribute it to me. Thanks