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Wednesday, June 13, 2012

Chesapeake and the Mississippi Lime


I am a Chesapeake Energy shareholder, and I'm happy to report that I am an increasingly optimistic Chesapeake Energy shareholder.
I became a Chesapeake Energy shareholder last fall at $25 per share because I am a big believer in the value of the assets that the company controls. My belief in the value of those assets is based on the repeated successful monetizations of pieces of those assets at prices that would imply that Chesapeake shares as a whole are dramatically undervalued.
Over the past month at these very depressed prices I've added significantly to my position.
A Very Depressed Share Price
Why are Chesapeake shares so depressed? I believe there are two big factors.
The first major reason for the depressed share price is the high level of debt that Chesapeake carries relative to its annual cash flow from operations. The plunge in natural gas prices this winter has exacerbated that problem by reducing cash flow and in doing so effectively increasing the level of leverage in the company.
The second major reason for the depressed share price is a distrust that investors have with the Chesapeake management team and its Board of Directors. This distrust has been created by controversial compensation and business dealings involving CEO Aubrey McClendon and a business plan that constantly changes.
I believe that the negative drag on the share price of Chesapeake from these two factors is starting to fade and will continue to diminish. That is why I have gone from being a disgruntled Chesapeake shareholder to an optimistic Chesapeake shareholder.
Good Things Happening

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