“History never repeats itself, but it often rhymes.”
This quote is attributed to Mark Twain and occasionally comes to mind when considering business situations. In the early 2000s, the US steel industry was on its heels. Almost everything in the industry was distressed and bankruptcies were abundant. Into this maelstrom went bankruptcy expert Wilbur L Ross. In just a few years, he acquired and rolled up a number of bankrupt steel companies to be profitably sold to Mittal in 2005.
Fast forward to today and the quote from John F. Kennedy, the 35th President of the United States comes to mind when considering the energy sector,
“When written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger and the other represents opportunity.”
I can’t help but think that someone like a Ross, a Tisch, a Zell or a Buffett will begin to do a roll up strategy acquiring high quality assets since the major oil & gas companies are too distracted by their own operations & finances to see the opportunity before them.
Case in point, Chesapeake Energy. Yes, a lot can go wrong with this company and they are paying for the sins of the forefathers, but let’s look at some basic & approximate calculations. For starters, they are the 2nd largest natural gas producer in the US.
Top 40 US natural gas producers
Conoco is #7 (Market cap $46 bio), BP (Market cap $92 bio) is #8, Chevron (Market cap $152 bio) is #10, and Shell (Market cap $118 bio) is #18.
A “market based” enterprise value for Chesapeake = $2.3 bio (Market cap) + $5.15 bio (Market value of $11.4 bio of debt) + $3.3 bio (Minority interests & preferred shares) – $1.759 bio (Cash) = $9.1 bio
They have 4,377,000 net acres of developed property and 3,656,000 acres of undeveloped property. Assuming the undeveloped land is only worth a quarter of the developed land value would mean the value per acre implied by the market is $9.1 bio / (4.377 mio + 0.914 mio) = $1,714 per acre of developed property and $428 per acre of undeveloped acre.
(Note – I’m unfamiliar with corporate debt and securities law around debt so take what follows with a pinch of salt. I’m just thinking out loud in areas that I have very little experience in but sense an interesting opportunity.)
These prices are significantly lower than where asset sales took place in the past. Which makes me wonder why someone with a stronger balance sheet and desire for a market leading position in natural gas production doesn’t start acquiring Chesapeake’s debt?
If an oil major were to start acquiring the debt they could either be in pole position for the assets during a bankruptcy/restructuring – or – earn a funding carry. Naturally, there’s a big caveat to this. If Chesapeake were to restructure their debt, the covenants could change or the returns diminish (maturity extended, etc.).
In the event that the majors are too preoccupied with their own company affairs, I would envisage a savy Ross, Tisch, Zell, or Buffett like player to enter with a rollup/asset acquisition strategy. Then in 3-5 years when the energy market stabilizes, they sell the entity to a major at a much higher valuation.
As I said, I’m not a credit or bankruptcy expert but the risk/reward from a countercyclical investment in shale gas assets looks as good as it gets. No?
Candid & Curious 