When Chesapeake Energy (NYSE: CHK) announced its "25/25" debt reduction plan a month ago, the investing community's response was understandably muted. "We've heard this story before" was the common refrain among folks I spoke to following the announcement. In the interim, the independent E&P has made some moves that bolster its credibility, in my view. These are always dangerous words in investing, but maybe it really is different this time.
One seemingly small step was the addition of Lou Simpson to Chesapeake's board of directors. Simpson is the fellow who, until his retirement last year, managed the portfolio at Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) GEICO subsidiary for the past few decades. As of 2004, he had achieved average annual gains of 20% over a 24-year period. This guy is value investing royalty. Whether he'll have a real impact on the board is unclear, but Simpson brings an independent voice and a keen understanding of the drivers of shareholder value creation. He is also a "significant shareholder" of Chesapeake, according to the press release issued at the time of his acceptance.
This board appointment was followed by Chesapeake's latest joint venture, this time in the Niobrara with China's CNOOC (NYSE: CEO). This move didn't mark any sort of departure for the firm, which has been cutting deals of this sort for the past few years. It simply served as a reminder that Chesapeake is really good at assembling land packages in emerging resource plays and monetizing those interests by bringing in third-party capital.
Perhaps the most notable step forward in Chesapeake's financial overhaul is today's announced plan to seek buyers for some $5 billion worth of assets. This includes the company's Fayetteville shale position, which is currently a joint venture with BP (NYSE: BP), as well as its investments in privately held Frac Tech Holdings and Chaparral Energy. Chesapeake says it expects to close all of these deals in the first half of the year.
BP would be the most likely buyer of the Fayetteville properties, as consolidating these sorts of operations under one roof makes a good amount of sense from a cost and efficiency standpoint. As for Frac Tech, the company has filed for an IPO, so that should make for an easy exit on Chesapeake's part.
Chaparral, Oklahoma's third-largest oil producer, almost came public through a special-purpose acquisition company merger in late 2009, but shareholders rejected the deal. I'm thinking the company would receive a warm welcome in the current ebullient environment for oil-weighted producers like Concho Resources (NYSE: CXO) and Denbury Resources (NYSE: DNR), but Chesapeake might be able to expedite its divestiture by selling to a private equity player rather than waiting for an IPO in this case.
In short, none of these transactions looks tough to pull off, especially in the current market climate. Chesapeake should be able to shave several billion dollars off its debt load with the after-tax proceeds. That should be great for both its credit rating and its standing with equity investors afraid of Chesapeake's overly leveraged balance sheet.
All signs point to progress being made at improving both the perception and the reality of Chesapeake's financial strength. I'm fully expecting further gains for shareholders from here.
