You've likely read comments by the host of analysts who follow Chesapeake Energy (NYSE: CHK) that the company is in a state of transition. Let me go one step further, as I see it actually undergoing a couple of transitions.
A minor miss
Before I move to Chesapeake's metamorphoses, let's take a glimpse at the company's quarterly results. For the period, Chesapeake's revenues reached $2.73 billion, up from $1.98 billion in the final quarter of 2010. Excluding special items, the earnings per share line came to $0.58, $0.01 below the consensus expectations, and down from $0.70 in the comparable quarter a year earlier.
At the same time, with the company's first transition involving a decrease in its relative production coming from gas rather than liquids, natural gas declined from 88% of total production a year ago to 82% in the most recent quarter. Obviously then, liquids expanded from 12% of the total to 18% in the December 2011-ended quarter.
Chesapeake has also pulled back materially on its capital expenditures in dry gas plays in favor of such liquids-rich locations as the Eagle Ford shale, the Utica shale, the Mississippi lime, and the Granite wash, among others. And given the slide in domestic natural gas prices, the company a month ago became the first major gas producer to announce a curtailment of gas production, a cutback that at Chesapeake has now reached 1.0 bcf per day.
An expensive change
Chesapeake founder and CEO Aubrey McClendon connected his company's first and second transitions on his postrelease conference call when he said:
... we entered 2012 with a strong momentum and sound business strategy to continue making the shift from a 90% natural gas producer in 2009 to a much more balanced producer in the years ahead. However, we acknowledge that this shift away from gas to oil has required us to outspend our cash flow, and we also acknowledge this is causing anxiety among some investors ...
Which returns us to an announcement by the company last week dealing with its plans to raise $10 billion to $12 billion this year to help fill the funding hole created by the gas-to-liquids switch.
The first part of a plan advanced by Chesapeake is the creation of a "volumetric production payment" on its Granite wash fields in the Texas Panhandle. Under this approach, the company will receive about $1 billion in cash in exchange for a promise to repay the funds in production from the fields. Secondly, a subsidiary is being created to hold a part of the assets from two Oklahoma plays in exchange for approximately $1 billion of preferred notes.
Further, the company will sell joint venture interests -- or perhaps the entirety -- of its holdings in its Mississippi lime and Permian basin plays in Kansas and Texas. (Should its total holdings in the two areas be sold, its compensation will likely be $6 billion to $8 billion.) And finally, Chesapeake expects to raise yet another $2 billion from the spinoff of its oil-field services unit and the sale of its midstream assets to its MLP unit.
The last-mentioned plan is difficult to juxtapose with COO Steve Dixon's comment on the call that "Our operations are further enhanced by our vertical integration into oilfield service and midstream operations." But beyond that, the asset store won't close down at the end of this year. It appears that the company will find it necessary to unload another $4 billion to $5.5 billion in assets next year to cover its funding shortfall.
It seems, however, that one of my Foolish colleagues has a logical cure for Chesapeake's (and many of its peers') still excessive supply of natural gas, while simultaneously doing something about gasoline prices and energy security. The revolutionary notion? Let's do something about ratcheting up the use of natural gas as a key transportation fuel, rather than simply discussing it. Indeed, we might even create public-private partnerships for gas transportation, rather than simply pouring taxpayer money down Solyndra-like rat holes.
Getting gas in gear
Within the past week, Fool contributor Brian Stoffel has looked at Westport Innovations (Nasdaq: WPRT), a company located north of the border that has created and manufactures engines that are able to run on 100% natural gas. Brian believes, as do I, that natural gas engines will gain their first impetus in long-haul trucking. Hence the importance of a partnership between Westport and Cummins (NYSE: CMI), the Indiana-based manufacturer of large truck engines.
Obviously, it'll require the addition of far more natural gas filling stations than the 1,100 units that sparsely populate our country before the phenomenon can reach a significant number of automobile drivers. So, is a far higher percentage of natural gas cars in the U.S. pie in the sky? Hardly. You may be shocked to discover that several far-from-advanced countries are way ahead of us there: Pakistan's roads are home to about 2.7 million of the cleaner-burning vehicles, and Iran and Argentina are each pushing toward 2 million similarly powered cars and trucks.
None of this is to say that Chesapeake is sitting on its hands, waiting for new natural gas transportation technology to be developed by others. In fact, in something of a third transition for the company, the ink is barely dry on a partnership contract under which Chesapeake will team up with 3M (NYSE: MMM) to design and develop lighter and more durable natural gas tanks to benefit the natural gas fueling process.
Foolish bottom line
For now, Chesapeake is being forced to play catch-up with the likes of EOG Resources (NYSE: EOG), which generated two-thirds of its wellhead revenues from liquids in the most recent quarter. Nevertheless, I see natural gas becoming viable as a transportation fuel. I'd urge you to place Chesapeake on your personalized version of My Watchlist.
