March 12 (Bloomberg) -- Chesapeake Energy Corp. Chief Executive Officer Aubrey McClendon is cultivating investors from Seoul to New Delhi eager to own natural gas that’s 85% cheaper than Middle East supplies because of a glut in the U.S.
As head of the second-largest U.S. natural gas supplier, McClendon met executives of Asian power utilities and state-run energy companies on a 14-day trip last month. He said they’re unfazed by Chesapeake’s $10.3 billion debt load, more than twice Exxon Mobil Corp.’s burden, and gas trading near a 10-year low of $2.23 per million British thermal units -- two factors that have helped send its stock down 25% in the past year.
“We are presently owned by a group of investors who don’t think gas prices will ever go above $4,” McClendon, 52, said in an interview in Oklahoma City, where Chesapeake is based. “I want to be owned by investors who live in a part of the world that believes gas prices will never go below $10.”
Chesapeake’s up-front costs to amass leases in gas-rich rock formations from Appalachia to the Rocky Mountains will pay off as overseas buyers flock to the U.S. market, the world’s biggest, for cheap and plentiful supplies of the fuel, he said.
McClendon, who co-founded Chesapeake in 1989, is counting on energy companies building the U.S.’s first export capacity at ports in the lower 48 states, allowing his investors to ship U.S. gas to more expensive Asian markets. His assumption was seconded by Exxon CEO Rex Tillerson, who told analysts four days ago he had “no doubt” North America will develop an export market, reversing Exxon’s previous skepticism.
$17 Billion Sale
Not all of Chesapeake’s partners are waiting on the future development of a North American gas-export market to profit.
Cnooc Ltd., China’s largest offshore energy producer, paid $1.08 billion in November 2010 for a one-third stake in Chesapeake’s holdings in an oil-rich section of the Eagle Ford shale in south Texas. The Hong Kong-listed company pledged another $1.08 billion to cover 75% of Chesapeake’s future drilling costs in the region.
With each acre of Chesapeake’s Eagle Ford property estimated by company geologists to hold 5,000 barrels of crude, Cnooc acquired about 1 billion barrels for $2.16 apiece. expenses for things such as pipes and pumping stations are adding another $15 a barrel of development costs in the area, leaving Cnooc ample room to profit when Texas crude is selling for more than $100 a barrel, McClendon said. By the end of 2013, he plans to sell more than $17 billion in assets including oil fields to cover a cash-flow gap aggravated by plunging gas prices. McClendon, who said he held 52 meetings in Asia, didn’t comment on pledges of new investment in the interview.
Divesting Permian Basin
This year, divesting holdings in the Permian Basin of west Texas and New Mexico will generate at least $5 billion, he said during the interview.
The Permian resource accounts for 5% of the company’s value, he said. By McClendon’s math, that means Chesapeake as a whole is worth $100 billion, more than six times its current $16.2 billion market value. Chesapeake controls 15 million net acres of oil and gas formations, more than three times the area of New Jersey.
“We have the assets they want, and we need their money,” he said in the March 6 interview, referring to Asian investors. “They don’t say ‘You’ve got $2 billion too much debt.’ They say ‘You’ve got what the world wants, and someday gas prices are going to be unlocked from the jail cell where they are today, and you’re going to be the biggest winner.’”
U.S. gas has tumbled 24% this year, following a 32% plunge in 2011. Soaring production from shale fields in Texas, Louisiana and Pennsylvania smashed open by high-pressure jets of water and sand inflated supplies at a time of mild winter weather that suppressed demand for the furnace fuel.
Gas futures traded in New York touched $2.23 per million British thermal units on Jan. 23, the lowest since February 2002. Meanwhile, utilities in Japan are paying more than $18 for gas from Indonesia and Yemen.
Chesapeake’s shares have lost 25% over the last 12 months compared with a 3.2% drop in the Standard & Poor’s Oil & Gas Exploration & Production index. Investors grew cautious as its margins shrank, even as net debt improved.
Return on assets last year dropped to 4% from 5%, compared with an average increase to 4.8% from 4% for the 16-member benchmark index, as Chesapeake was stung by the swelling glut of North American methane. The company is responding by cutting gas-drilling expenditures to the lowest since 2005.