James Sullivan, a noted analyst at Alembic Global Advisors, says that troubled Chesapeake Energy Corporation (NYSE:CHK) can generate a cash surplus of $2 billion in the second half of 2012 by selling assets to cover the $12 billion shortfall. In case the company doesn’t sell any assets, its funding gap may shoot up to $18.5 billion by the end of 2013.
The sale of pipeline-related assets for $4 billion and other sales in the future would compensate for the financial strain the company has faced due to decade-long low natural gas prices. Chesapeake Energy Corporation (NYSE:CHK) may also sell off 1.5 million acres of the oil-rich Permian basin holdings valued at $5 billion.
“Corroborating our sense that Chesapeake’s management finally ‘gets it,’ it appears that the company is getting more aggressive about its asset sales and, importantly, about building a margin of safety into its hitherto precarious financial situation,” says James Sullivan.
Sullivan notes that the company is now serious about shareholders’ concerns. Chesapeake has removed Aubrey McClendon as board chairman and appointed Archie Dunham as the new chairman. McClendon was alleged to have a conflict of interest. The company has cut directors’ compensation and replaced four of its directors with the top investors.
Chesapeake has been surrounded by a number of controversies. Recently Reuters reported that Chesapeake had a secret agreement with Encana, the Canadian natural gas producer, to lower the land prices in Michigan. The company board has been criticized over its poor oversight. Despite the cash shortfall, Chesapeake has fueled expansions through debt, which analysts consider way too aggressive.
Sullivan says that the current combination of the well-connected CEO and a shareholder-oriented board is the right one to execute the sales to rid Chesapeake of the present financial mess.