By the end of last week, shares of Chesapeake Energy (NYSE: CHK ) had fallen so far that the leading natural-gas producer appeared to be headed for one of two outcomes. Either the company was on its way to bankruptcy, as rumored, or the company would continue on its value-creation crusade and generate multibagger returns for its shareholders.
To convince investors that the latter course is the only likely one, Chesapeake held a conference call on Monday to update everyone on several fronts.
First, the company cut capital spending for the fourth time in as many months. Nearly $10 billion has now been pulled out of Chesapeake's combined 2009 and 2010 budgets since the end of July. That's about a 58% decline -- significantly deepening the cautionary cut back in September.
Chesapeake's new budget means that it's finally living within 2009 and 2010 cash flow, regardless of whether future asset sales happen. To someone like Apache (NYSE: APA ) , such an approach is second nature, but despite its steady cuts, Chesapeake has been one of the slowest to completely conform to cash-flow neutrality.
This is a source of real relief for investors. Another is that Chesapeake has dialed back on some potentially dilutive share issuances.
The company says it filed a series of shelf registrations with the SEC (a precursor to future stock sales) to maximize flexibility, and with no specific intention to issue shares for cash in the near term. Investors saw as much as 17% share dilution, however, and severely punished the stock. CEO Aubrey McClendon called these filings a mistake, apologized, and asked for forgiveness. As if the man's margin call weren't humbling enough!
Apologies aside, McClendon remains an apologist -- in the Socratic sense -- for the Chesapeake machine. It is hard not to find his arguments compelling. Through joint-venture agreements with BP (NYSE: BP ) , Plains Exploration & Production (NYSE: PXP ) , and, most recently, StatoilHydro (NYSE: STO ) , Chesapeake has both unlocked a lot of value and secured a large drilling cost carry over the next few years. This comes exactly when cash is the most tight, and it ensures that Chesapeake will maintain strong reserve replacement rates over the course of the industry downturn.
Combined with the company's ample commodity hedges, I think we can easily dismiss the rumors of Chesapeake's pending demise. A multibagger, "mother of all recoveries" -- to borrow McClendon's phrase -- is far more likely.