Photo: The Lost Ogle
Chesapeake Energy’s stock has seen a lot of volatility largely due to revelations regarding CEO Aubrey McClendon’s financial situation with the company.But analysts have also raised some flags regarding the day-to-day operations at the country’s second-largest natgas producer recent troubles.
Argus Research’s Phil Weiss recently published a note voicing his discomfort with the company.
“While SELL-rated Chesapeake Energy Corp. continues to generate cash via asset monetizations, and plans more of the same, it continues to rely largely on financial engineering transactions to raise cash,” he writes.
Weiss goes on to cite the Oklahoma-based firm’s spending levels (“unsustainable and ill-advisable“), weak debt reduction strategy (“it has increased obligations that we consider akin to debt, such as preferred stock and volumetric production payments” — selling future production revenues up front) and accounting methods (“opaque“).
“In our opinion, CHK’s short-term cash needs are so significant that it needs to use financial transactions to accelerate cash receipts in order to finance its activity. These include volumetric production payments; long-dated call options; sale-leaseback transactions; a royalty trust; IPOs or spin-offs of partial interests in some of its vertically integrated businesses; and joint venture activities”
Here’s the summary money quote:
“In our view, the way that Chesapeake is managed bears some resemblance to what we might see at a hedge fund or venture capital fund. CHK seems to be a combination of an E&P company, an oilfield services company, and a financial entity.”