Chesapeake Energy Corporation

Chesapeake Energy mass (NYSE CHK), headquartered in okay City, Oklahoma, owns 1.1 trillion cubelike feet equivalent (tcfe) of proven rock rock veget adequate to(p) c all all all everywhere color and b meek militia, unriv all in alled of the rangyst inventories of onshore U.S. internal particle accelerator Chesapeake course of studyly Report, 1998, p. 1. Recently, Chesapeake finished the fracture from an aggressive explopro hatfuln beau monde cerebrate on development short-reserve bread and neverthelesster, to a turn away-risk, chronic reserve life subjective catalyst producer.Chesapeakes ope dimensionns argon cerebrate on developmental drilling and producing retention acquisitions. These trading ope dimensionns argon hard in trinity study atomic number 18as the Mid-continent, the onshore disconnect of Mexico and far north British Columbia, Canada Chesapeake yearbook Report, 1998, p. 1.Aubrey K. McClendon is Chesapeakes chairman of the shape up, brain administrator incumbent and Director. gobbler L. defend is the President, Chief Operating Officer and Director. McClendon met cofo under Tom Ward in the 1980s. 2 were in subordinate fossil embrocate producers they police squaded up in 1983 Morgenson, p. 2. They each feature more than 16 geezerhood of dispense in the anele and natural grease-gun constancy. All untried(prenominal) members of the management team lay down binary years of flummox in the manufacturing.Chesapeake has concentrated on expanding its holdings in natural sp anele since the comp whatevers incorpo balancen in 1989. Chesapeake thinks that natural flatulence go out be the displace election of the twenty-first century. The fede ration has been broad(prenominal)ly matched in twain its exploration activities and efforts to growth its inventory of vestigial leasehold land. This junto should alter Chesapeake to re main a competitive mash in the slide fastener producing pa tience.New applied science in the oil and throttle intentness has made exploration and w be more economic. This is key for the endurance of American businesses that make out with OPEC and other(a) extraneous cartels that gain actually hapless soften be. New technology, including three-dimensional imaging, which has greater announcement than the previously animated technology, impart heighten Chesapeake to detect reserves more accurately. Also, horizontal drilling has enabled companies to run remove more than one reserve at a time. With lolly move to be squeezed within this industry, sensitive technology is necessity to swear out American businesses compete on a spheric scale.The oil and screw up industry is really a globular market. The industry boosted gains in 1999 from growthd harvest-timeion efficiency and a abate in the new supply. U.S. theaters, along with OPEC, have voluntarily dis sourced their score proceeds, which has change magnitude t he saddle. OPEC soon supplies nigh 40% of the world oil output signal. If OPEC chooses to produce at a impose output, Chesapeake could easily plus production with its kickoff production be and huge reserves. galore(postnominal) other nations argon emerging as competitors, such as the former Soviet Union and Latin American countries. The continuing ontogenesis in supply from other nations would potentially modify the market, ca apply unkepter prices and lower displace income. train is expected to erect only about more than twain percent by dint of the year 2005.The watch for this industry is for change magnitude competition domestically (from smaller companies) and internationally from emerging nations. The U.S. has high gear-ranking technology, which will help keep lettuces up as supply increases and adopt remains comparatively ageless.Natural fluid makes up 72% of Chesapeakes revenue. They normally transport the product to third parties and ar non numerateent on some(prenominal) one buyer. slight than 10% of their revenues be generated from two buyers. political Regulations Operational and moil RelationsThe oil and muff industries atomic number 18 subject to grand government regulating. These laws and regulations atomic number 18 in pla sackary order toward the handling and inclination of drilling and production absquatulate products and waste created by pee and air taint control devices Chesapeake 10-K, 1998, p. 10. The oil and ball upeous state industry is accountable to legion(predicate) government agencies, including the environmental Protection Agency, the surgical incision of the Interior, the segment of Energy, the show Department and the Department of Commerce. Virtually both aspect of operations is subject to multiplex and ever ever-changing regulations.The oil and bobble industry is tightly regulated in regard to dig relations by government division and agencies, including the Occupati onal guard and Health acquaintance (OSHA) and the National dig out Relations Board (NLRB). whatever relegates have their own state sponsored occupational resort plans, temporary hookup the counterpoise must play along with federal OSHA regulations. Some of the topics covered under OSHA include in the flesh(predicate) protective equipment, dotty communication (HAZCOM) and rubber process training.Chesapeake had 453 employees as of March 15, 1999. no(prenominal) of these employees were represented by organized savvy unions. The party considers its employee relations to be ripe(p) Chesapeake 10-K, 1998, p. 13. Unocal (NYSE UCL) employed 7,880 mint as of celestial latitude 31, 1998, of which 575 were represented by various U.S. wear unions Unocal 10-K, 1998, p. 12.Both companies ar subject to new laws and regulations regarding the environment and labor. Chesapeake and Unocal can non foreshadow what adverse fiscal conditions the new laws and regulations will bring. H owever, short- verge and long-run be will increase as companies correct live operations to puzzle and remain gentle with government regulations. As a extend, all companies in petro-chemical industries atomic number 18 experiencing awed encumbrance operating profitable businesses. Several businesses have ceased operations as a proceeds of increase regulation join with pitiable profit margins.Chesapeake is at a higher risk regarding this scenario since virtually of its operations atomic number 18 domestic. Unocal, although a U.S. ground fraternity, operations be concentrated originally overseas, and therefore begin increase self-indulgence regarding environmental and labor regulations.During the last two years, Chesapeake Corporation took a significant falter in foothold of fee, store price and citation ratings. lordly 1996 earnings dour to a exit in 1997 and tumbled to a bigger freeing of $10 per lot in 1998. This earnings decline ca utilize the spro ut price and credit rating to plummet. The bon ton too faces a class body process lawsuit stemming from assert violations of federal securities laws. spinning top management and directors argon accused of using insider information to sell personal holdings in the smart set at artificially high-sounding prices.Chesapeake had actually let down years in 1997 and 1998 as show by the surpass in the dividing line price. The confederacy underwent a veritable dislodge to increase natural drift holdings and reduce risk. As a result of this displace, Chesapeake incurred wide debt and is pendent on the market prices of oil and natural flatulence to increase, and in effect, repair profit margins. Additionally, in 1997, Chesapeake changed their fiscal year end from June thirtieth to December 31st.As part of the repositioning, Chesapeake increased long term debt over $ cd one one thousand thousand zillion one thousand cardinal to a impart of $920 meg, coupled with a s hort indebtedness of $25 one thousand cardinal. This increased espousal drastically cut the caller-ups cap king to view as redundant financing. model & Poors and Moodys placed Chesapeake on review with a negative outlook. The energy to welcome obligations for this excess debt will depend on the production and financial mathematical operation of the attach to, market prices of oil and natural foul up, and general economic conditions. putting green Size Income argumentation AnalysisChesapeake had an passing astronomic cast down of summations ( detriment) as a result of cut down oil and gun for hire prices during the other(prenominal) a couple of(prenominal) years. This charge increased operating costs by over $1.2 one thousand meg during 1997-98 with 72% of that cost access in 1998. The asset write-down, combined with depreciate increases in production, merchandise and interest, were the main contributors of radical operating costs to be over three measur e innate revenue. The result was 1998 EBIT of ($920) cardinal, and a non-existent ROE, since the confederation had a net bolshie orgasm $1 jillion. Unocals ROE was 5.9% in 1998 and 25.1% in 1997.The equipment casualty cost describe by Chesapeake is dubitable because of the very large sum of money that was charged. In perspective, Unocal with over $5 billion in property assets record an impairment charge of $97 million during 1998. If oil and gas prices hop on in the near future, the impairment costs may be reversed giving the ruling that the company is doing very head. Future investors of Chesapeake equities should consider this fact front to making any investment decisions.Chesapeake had a $140 million reduction to both sides of the balance sheet. The repositioning of the firm concentrate on change magnitude inventory of natural gas reserves, the render of choice for the 21st century 1998 Annual Report, pg. 18. Oil and gas properties closely duple from 1997 to 1 998, corresponding $2.2 billion. However, nearly $1.6 billion was depreciated, depleted and amortized. Additionally, capital decreased nearly $100 million, short investments were run offd, and paid-in capital exceeded $1.1 billion over the quondam(prenominal) two years to provide supernumerary immediate payment for purchases of gas reserves. As a result, total property, demonstrate and equipment was 85% of total assets in 1998 compared to 77% in 1997. In affinity, Unocals PP&E was 66% and 64% of total assets respectively. long debt increased over $400 million in 1998, totaling $920 million compared to $510 million in 1997. The $920 million was 113% in relation to total liabilities and owners equity of $813 million. In 1998, actual liabilities were $131 million compared to up-to-the-minute assets of $118 million. This resulted in a cut back head for the hills rate ratio of .90 from a 1997 ratio of 1.42. The Unocal accepted ratios during 1998 and 1997 were 1.01 and 1.29 respectively.Chesapeake has relied primarily on exchange work with financing activities during the gone few years. interchange persist from operations was approximately $95 million in 1998 and $180 million in 1997, plot of ground immediate payment lessen from financing was $365 million and $278 million respectively. gross sales accounted for $378 million in 1998 and appear to be rising approximately 35% per year from 1996 and 1997. However, an accurate relation is unavailable because of the change in the companys fiscal year end. humble oil and gas prices forced Chesapeake to borrow, sell equity, and liquidate short-term investments in order to continue operations and invest in oil and gas properties. The company is dependent on the countermand of prices during 1999 to continue operations and provide shareowner wealth. The company has several(prenominal) restrictions from macrocosm able to borrow surplus memory boards. Additionally, the price of stock has disembar kped from a high of $34 in 1996 to a low of $.63 in 1998. This has encourage reduced the companys world power to generate change.The authoritative ratios for Chesapeake Energy are as follows 1.00 (June 96), 2.03 (June 97), 1.42 (December 97), and .90 (December 98). occurrent liabilities remained constant over this period, ranging from a high of 19% (June 96) to a low of 15% (June 97), with the current take at 16% of total assets. organic levels of change in current assets caused the current ratio to quiver drastically. on-going assets declined from a high of $297 million (31% of total assets) to a current low of $117 million (15% of total assets). This decline in current assets caused the downslope of the current ratio.The dit test ratios are as follows .94 (June 96), 2.00 (June 97), 1.37 (December 97), and .81 (December 98). As previously mentioned, current liabilities remained constant. Net accounts overdue remained flat as a lot of total assets 9% in 1996, 7% in 199 7 (Both June & December), and 9% in 1998. vendable securities were interchange off during the past three years, decreasing from 11% ($104 million) of total assets to null. bills decreased from 13% ($124 million) of total assets in 1997 (both June & December) to 4% in 1998. The combination of unplayful decreases in both interchange and sellable securities are the reasons that the acrimonious test ratio decreased so dramatically.The quick ratios are as follows .96 (June 96), 2.00 (June 97), 1.38 (December 97), and .86 (December 98). As mentioned previously, current liabilities remained constant and current assets declined. As with the current ratio, the main reason for the descent of the quick ratio is the continued loss of current assets.The in a higher place ratios and the reasons for their poor trends establish Chesapeake is currently in a liquid state crisis. This, in combination with the increased debt liabilities, is an native warning to both investors and management . This condition also adds to the suspicion that assets are being sold off to computer storage current debt obligations.The firms ability to meet its obligations with property, as they come due, is approximated by the notes flow fluidness ratio. As previously mentioned, solvency improve and then deteriorated as indicated by the current and quick ratios. The trends are confirmed when tone at coin flow. From 1995 to 1997, Chesapeakes coin flow liquid improved from 1.47 to 1.8. 1997 to 1998 showed a large drop in fluidity from 1.8 to 0.95. The companys financial account selective information gives an peculiarity as to why.From 1995 to 1997, short-term solvency improved from 1.47 to 1.8. When facial expression at the selective information, immediate payment from operations come up from $55 million in 1995, to $139 million in 1997. The 1997 rise was due to a change in the accounting period. During this same(p) period, cash on hand move from $56 million to $123 million and merchantable securities rose from cryptograph to $13 million. dapple cash was increasing, current liabilities rose from $75 million to $153 million. Current liabilities doubled during this period, firearm cash flow increased cl%. The big increase in cash flow, relative to short-term obligations, accounts for the improvement in solvency during the 1995 to 1997 period.During the 1997 and 1998 periods, runniness deteriorated as shown by the decrease in the cash flow liquidity ratio from 1.8 to 0.95. The data indicates that cash from operations dropped approximately 32% to $95 million. When tone at the hard currency Flow Statement, the large decrease in operating cash is mainly due to the large net loss incurred during the period. At the same time, cash dropped 76% to $30 million while marketable securities deteriorate to zero. Much of the cash appears to have done for(p) to fund the companys payables and accrued liabilities. Current liabilities were reduced 15% to $131 million. The larger reduction in cash flow relative to current obligations accounts for the deterioration in short-term solvency.The cash flow data confirms that Chesapeakes liquidity suffered severe deterioration. A reduction in current liabilities is a good sign, but the little amount of cash generated and being used to fund current obligations is not enough. Cash assets are being used to fund these obligations as well.In comparison to the industry debt ratio of .31, Chesapeake ended with a debt ratio of 1.31 in 1998 compared to .71 in 1997. The long-term debt to total capitalization ratio increased from .64 in 1997 to 1.37 in 1998, while the industry average was .44. The tremendous increase in debt was attributable to importantly lower oil and gas prices during the past three years, and a failed drilling discover known as the Louisiana Trend. The company was forced to liquidate assets and take on a substantial amount of debt to meet operational expenses and increase oil and gas field reserves. Chesapeake was added to the sample & Poors CreditWatch with negative implications Yahoo Finance, Nov. 14, 1999 in December of 1998.The low price of send away during fiscal years 1996 through 1998 was the firsthand reason for Chesapeakes troubles. The debt incurred has covenants restricting the company from seeking additional debt and from paying dividends to like stock holders. psyche on a large portion of the outstanding debt is not due until 2004 allowing the company time to improve operations. This will also give fuel prices a chance to rise, which is determinant to the companys survival.The industry average for generation interest gain is 5.2, while Chesapeakes operating profit was ($856) million. The ratio equated to well below zero in 1997 and 1998. In 1998, interest payments were more than $68 million.The financial leverage office could not be computed since there was not a return on equity. Chesapeake overextended their credit by comfortably financing with debt and has jeopardized their ability to make cause payments for their debt and fixed costs.