Is Going Global Really the Answer for Chesapeake Energy?

 

Source: Chesapeake Energy.

Chesapeake Energy (NYSE:CHK) CEO Doug Lawler has a lot on his plate. Since leaving global oil giant Anadarko Petroleum (NYSE:APC) to take over the top job at Chesapeake Energy, he has been working feverishly to unwind the company's complex financing and production agreements as well as cut the company's expenses just so it can survive. At the same time, he has battled legacy legal issues that continue to threaten the company.

There is still a serious concern in the investment community that Lawler won't be able to turn the company around. However, he is at least making progress, as evidenced by the company's strong first-quarter results. He's not stopping there, either, as he has a bold goal for the company's future. His goal is to eventually follow the model of Anadarko Petroleum and turn Chesapeake Energy into a global energy company, according to a recent story by Bloomberg. The question is if that's the right move for the company.

The Anadarko model
As far as exploration companies go, Anadarko Petroleum is a great model to follow. The company enjoyed a 67% deepwater exploration/appraisal success rate last year, discovering more than 900 million barrels of oil equivalent, or BOE. The company was also a partner on two of the top 10 largest deepwater discoveries last year. These discoveries fuel the company's model, which is to discover and appraise, and then either monetize or optimize the discovery, as the following slide notes.

Source: Anadarko Petroleum Investor Presentation (link opens a PDF).

This model has been highly successful. As that slide noted, since 2004 the company spent $9 billion to discover more than 6 billion BOE. As part of its appraisal process, it decided to monetize about a billion BOE of those discoveries, netting the company around $10 billion. Because of that, Anadarko Petroleum ended up with an extra billion dollars in its pockets to go with 5 billion BOE of resources to be developed. That's a pretty exceptional value creation, which is why Lawler wants to see that model repeated at Chesapeake Energy.

What this could mean for Chesapeake Energy
Chesapeake Energy had a similar philosophy when it came to U.S. shale. The company was typically a first mover to acquire acreage in a new play, which it later used as currency to fund its drilling program. The problem with Chesapeake Energy is that its extensive use of creative financing and debt backfired when natural gas prices plunged, taking the value of its land bank down with it.

That said, worldwide gas and oil prices are trading at a premium to U.S. energy prices, which is likely what Lawler sees when he thinks about taking Chesapeake Energy outside the U.S. The big question is, where would Chesapeake Energy go?

It could take its shale expertise to a place like Poland, Australia, or China, as each has known shale resources. However, international shale plays have proven to be tough to crack, which could make it tough for Chesapeake Energy to move the needle in the short term. Its other option is to go offshore, which has been the key to Anadarko Petroleum's success.

Source: Anadarko Petroleum. 

The only problem with that is Anadarko Petroleum's success isn't necessarily going to be repeated at Chesapeake Energy. While its deepwater exploration/appraisal success rate has averaged around 70% since 2009, that's well above the industry's average of around 50%. Given the short-term needs of the company, rolling the dice on deepwater wells might not work out as well as hoped.

Investor takeaway
While eventually going global has its appeal, Chesapeake Energy would really need to be patient and find the right partner and the right play. That's a pretty big risk for a company that already has a huge inventory of land here in the U.S. that still needs to be developed. Further, new liquids rich plays are still being discovered, which suggests the company doesn't really need to go overseas for growth. So, while this is an idea that has some merit, I'm not sure its the best next move for the company right now.